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 Rs12. Using marginal cost and marginal revenue approach, find out the level of equilibrium output. Give reasons for your answer

Output (units)	1	2	3	4	5	6
Average Cost (Rs.)	12	11	10	10	10.4	11

Answer 1

The producer’s equilibrium refers to the situation in which he maximises his profits. A producer strikes an equilibrium when two conditions are satisfied

Units	Average Cost (Rs)	Total Cost (Rs)	Marginal Cost (Rs)
1	12	12	12
2	11	22	10
3	10	30	8
4	10	40	10
5	10.4	52	12
6	11	66	14

This table indicates that the two conditions of equilibrium are satisfied only when 5 units of output are produced. It is here that (i) MR = MC = Rs 12 and (ii) MC is rising.  The market price per unit of the product is Rs 12. Thus MR = 12.