Question -
Answer -
The conditions must hold if a profit maximizing firm produces positive output in a competitive market when price is constant’under MR/MC approach is determined where,
(i) MR = MC (ii) MC must be rising
| Output (Units) | Marginal Revenue (Rs) | Marginal Cost (Rs) |
| 1 | 8 | 10 |
| 2 | 8 | 8 |
| 3 | 8 | 7 |
| 4 | 8 | 8 |
| 5 | 8 | 9 |
According to Table, both the conditions of equilibrium are satisfied at 4 units of output. MC is equal to MR and MC is rising. MC is more than MR when output is produced after 4 units of output. So, Producer’s Equilibrium will be achieved at 4 units of output. However, MR is equal to MC at 2 units of output also. But, second condition is not fulfilled here.
Let us understand the determination of equilibrium with the help of a diagram:
Producer’s Equilibrium is determined at OQ level of output corresponding to point E as at this point, MC = MR and MC curve cuts MR curve from below. In Figure, output is shown on the horizontal axis and revenue and costs on the vertical axis. Producer’s equilibrium will be determined at OQ level of output corresponding to point E because at this, the following two conditions are met:
(i) MC = MR;
(ii) MC curve cuts the MR curve from below.
When MR > MC, then producer will continue to produce as long as MR becomes equal to MC. It is so because firm will find it profitable to raise the output level.
When MR < MC, then producer will cut down the production as long as MR becomes equal to MC. It is so because firm will find it unprofitable to produce an extra unit. So, it starts reducing the level of output till MR = MC.