Question

With the help of the given schedule, determine the firm's equilibrium using marginal revenue − marginal cost approach. Give valid reasons in support of your answer.

Output (in units)	Total revenue (TR) (in ₹)	Total  Cost (TC) ( in ₹)
1	20	20
2	40	30
3	60	36
4	80	40
5	100	60
6	120	90

Answer 1

Output (in units)	Total revenue (TR) (in ₹)	Total  Cost (TC) ( in ₹)	Marginal Revenue (in ₹)	Marginal Cost (in ₹)
1	20	20	-	-
2	40	30	20	10
3	60	36	20	6
4	80	40	20	4
5	100	60	20	20
6	120	90	20	30

According to the MR-MC approach, the firm (or producer) will attain its equilibrium, where the following two necessary and sufficient conditions are fulfilled.

1. Necessary Condition or First-Order Condition (FOC)
MR = MC
or,
`(d("TR"))/(d"x") = (d("TC"))/(d"x")`

where we are differentiating TR and TC with respect to the output (x).

2. Sufficient Condition or Second-Order Condition (SOC)
MC curve is rising and cuts MR curve from below
Slope of MC > 0

∴ `(d("MC"))/(d"x")>0`

This implies that the slope of the MC curve should be positive at the point of intersection with the MR curve.

The producer's equilibrium is struck when the output level is 5 units. This is because, at the output level of 5, both MR and MC are equal, which is equal to 20. And also, MC is rising at this level.