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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) | 1 | 2 | 3 | 4 | 5 | 6 |
| Average Revenue (Rs) | 20 | 20 | 20 | 20 | 20 | 20 |
| Total Cost (Rs) | 22 | 42 | 60 | 76 | 96 | 120 |
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Solution
| Output (Units) |
Average Revenue (Rs) |
Total Cost (Rs) |
Marginal Cost |
| 1 | 20 | 22 | - |
| 2 | 20 | 42 | 20 |
| 3 | 20 | 60 | 18 |
| 4 | 20 | 76 | 16 |
| 5 | 20 | 96 | 20 |
| 6 | 20 | 120 | 24 |
The firm would be in equilibrium when following two conditions are satisfied:
i. AR/MR = MC = 2
ii. MC is rising or the MC curve cuts the MR curve from below
Thus, at 5 units of output, the firm is in equilibrium as both the conditions are getting satisfied at this level.
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