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Question

Given below is the cost schedule of a product produced by a firm. The market price per unit of the product at all levels of output is Rs.12. Using marginal cost and marginal revenue approach, find out the level of equilibrium output. Give reasons for your answer:
Output (Units)123456
Average Cost (Rs.)1211102010.411

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Solution

Output (Units)Average Cost (Rs.)Total Cost (Rs.)Marginal Revenue = Average Revenue (Rs.)Marginal Cost (Rs.)
1
2
3
4
5
6
12
11
10
10
10.4
11
12
22
30
40
52
66
12
12
12
12
12
12
12
10
8
10
12
14
Producer is in equilibrium at 5th unit of output.
Reason: At output levels 1st and 5th unit, MR and MC are equal which is 12 in this case. But the producer is in equilibrium at 5th unit only where MR=MC(=12) and MC is rising.
The level of equilibrium output is 5th unit.

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