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From the following data find out the level of output that will give the producer maximum profit (use marginal cost and marginal revenue approach). Give reasons for your answer.

Output (units) 1 2 3 4 5
Total Cost in Rs. 9 17 24 29 36
Total Revenue in Rs. 11 20 27 32 35
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1 Answers

The equilibrium level of output will be 4 units. This is because at this point the two conditions of equilibrium (using MR-MC approach) are met. This can be seen as follows:

We are given the Total Revenue (TR) and Total Cost. From here, we can find Marginal Revenue (MR) and Marginal Cost (MC), as given in the following schedule.

Units Total Cost Marginal Cost Total Revenue Marginal Revenue
1 9 9 11 11
2 17 8 20 9
3 24 7 27 7
4 29 5 32 5
5 36 7 35 3

 

Here, as we can see, the first and the order conditions of equilibrium through MR-MC approach are being met at unit 4. That is,
First Condition: MR=MC=4
Second condition: MC is rising from this point and meets MR from below.
Thus, equilibrium output is 4 units.

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