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Question

Using marginal cost and marginal revenue approach, find out the level of output at which producer will be in equilibrium. Give reasons for your answer.
Output (Units)123456
Average Revenue (Rs.)202020202020
Total Cost (Rs.)2242607696120

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Solution

Output (Units)Average Revenue = Marginal Revenue (Rs.)Total Cost (Rs.)Marginal Cost (Rs.)
1
2
3
4
5
6
20
20
20
20
20
20
22
42
60
76
96
120
22
20
18
16
20
24
Producer is in equilibrium at 5th unit of output.
Reason: At output levels 2nd and 5th unit, MR and MC are equal which is 20 in this case. But the producer is in equilibrium at 5th unit only where MR=MC(=20) and MC is rising.
The producer is in equilibrium when 5 units of output are produced.

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