Producer Equilibrium

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Questions:

Generic 6

7 x 6 = 42

Find maximum profit situation from the table:

Output (in Units)	TR(Rs)	TC(Rs)
1	50	60
2	60	65
3	68	68
4	70	60
5	75	75
6	80	95

Calculate:
(i) Output level showing loss.
(ii) Output level showing break-even point.
(iii) Output level showing maximum profit.

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 Rs 12 .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

Why is the equality between marginal cost and marginal revenue necessary for a firm to be in equilibrium? Is it sufficient to ensure equilibrium? Explain

Explain the producer's equilibrium with MR/MC approach (when price falls with the rise in output).

Explain why will a producer not be in equilibrium if the conditions of equilibrium are not met.

Can there be a positive level of output that a profit-maximizing firm produces in a competitive market at which market price is not equal to marginal cost? Give an explanation.

Explain the producer's equilibrium with MR/MC approach (when Price remains constant with the rise in output).

Generic 3

3 x 3 = 9

"MC should be rising at the point of Producer's Equilibrium". Comment.

What is the relation between Price and MC at equilibrium (when price falls with the rise in output)?

10.

Will a profit-maximizing firm in a competitive market ever produce a positive level of output in the range where the marginal cost is falling? Give an explanation.

1 Marks

4 x 1 = 4

11.

What is the general profit maximising condition for a producer (MRand MC approach)?

12.

Explain the producer's equilibrium.

13.

What are the two methods for determination of producer's equilibrium?

14.

What is meant by profit?

Multiple Choice Question

3 x 1 = 3

15.

What is the relation between price and marginal cost at equilibrium, when price remains constant with the rise in output.

(a)

Price = Marginal Cost

(b)

Price> Marginal Cost

(c)

Price < Marginal cost

(d)

None of these

16.

What is the relation between price and marginal cost at equilibrium, when price falls with the rise in output.

(a)

Price = Marginal Cost

(b)

Price> Marginal Cost

(c)

Price < Marginal cost

(d)

None of these

17.

If MC is more than MR at a particular level of output, how will the producer react to maximize the profits________________

(a)

Decrease Production

(b)

Increase Production

(c)

Increase Revenue

(d)

None of these

True or False

3 x 1 = 3

18.

A firm gets maximum profits only if difference between average revenue and average cost is the maximum

(a)

True

(b)

False

19.

If marginal revenue is equal to the total cost, producer is in equilibrium

(a)

True

(b)

False

20.

A producer is in equilibrium when total cost and total revenue are equal.

(a)

True

(b)

False

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Answers Key:

Generic 6

7 x 6 = 42

Output (in Units)	TR(Rs)	TC(Rs)	Profit (TR-TC)
1	50	60	-10=(50-60)
2	60	65	-5=(60-65)
3	68	68	0=(68 - 68)
4	70	60	10 = (70 - 60)
5	75	75	0= (75 -75)
6	80	95	-15 =(80- 95)

(i) At output level of 1 unit, 2 units and 6 units, producer is incurring loss.
(ii) At output levels of 3 units and 5 units, producer is earning zero profit (also called normal profit). These are break-even levels of output.
(iii) At output IeveIs 0f 4 units, producer is earning profit (also called supernormal profit).

Output (Q)(in units)	Price (P)(Rs)	AC(Rs)	Marginal Revenue(MR)(Rs)	TC(Rs)	MC(Rs)
1	12	12	12	12	-
2	12	11	12	22	10
3	12	10	12	30	8
4	12	10	12	40	10
5	12	10.4	12	52	12
6	12	11	12	66	14

The producer will be at equilibrium at 5 units of output which satisfy both the conditions of producer's equilibrium.
(i) MC = MR
(ii) MC must be rising.

When there is no fixed price and price falls with the rise in output, MR curve slope downwards. Producer aims to produce that level of output. at which MC is equal to MRand MC curve cuts the MR curve from below. Let us understand this with the help of following table:

Units of Commodity	MR(Rs)	MC(Rs)
1	10	9
2	9	7
3	8	6
4	7	7
5	6	8
6	5	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. Letus 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; and
(ii) MCcurve 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.
So, the producer is at equilibrium at OQ units of output.

Units of Commodity	MR(Rs)	MC(Rs)
1	10	9
2	9	7
3	8	6
4	7	7
5	6	8
6	5	9

The profit-maximizing level of output is always determined where,
(i) MR = MC
(ii) MC must be rising. In other words, where price is equal to MC.
If price is not equal to MC, profit-maximizing condition cannot hold. It can be explained with the help of the following two cases:
Case 1: Price Greater Than MC
(i) In the given figure at output level q₂, the market price is greater than marginal cost.
(ii) To show that q₂ is not a profit maximizing level of output, we have taken q₃ output level, which is right of q₂.
(iii) Suppose the firm increases its output level from q₂ to q₃. The increase in total revenue of the firm from this output is the market price multiplied by the change in quantity (\(\triangle\) TR= market price x \(\triangle\)Q), that is, the area of rectangle q₂q₃CB.

(iv) On the other hand, the increase in total cost with this increase in output is the area of the region q₂q₃XW.
(v) But, a comparison of the two area shows that the firm's profit is higher when output level is q₂q₃ rather than %. So, % is not a profit maximizing level of output.
Case 2: Price Less Than MC
(i) In the given figure at output level q₂, the market price is less than marginal cost.
(ii) To show that %is not a profit maximizing level of output, we have taken q₃output level, which is left of q₂.

(iii) Suppose now, that the firm reduce its output level from q₂ to q₃. The decrease in total revenue of the firm from this output is the market price multiplied by the change in quantity (\(\triangle\)TR = market price x \(\triangle\)Q), that is, the area of rectangle q₂q₃CB.
(iv) On the other hand, the decrease in total cost with this decrease in output is the area of the region q₂q₃WX.
(v) But, a comparison of the two area shows, that by reducing the output from q₂ to q₃, the decrease in cost is more than the loss in revenue.
So, q₂ is not a profit maximizing level of output.

The profit-maximizing level of output is always determined where,
(i) MR = MC
(ii) MC must be rising. In other words, where price is equal to MC.
If price is not equal to MC, profit-maximizing condition cannot hold. It can be explained with the help of the following two cases:
Case 1: Price Greater Than MC
(i) In the given figure at output level q₂, the market price is greater than marginal cost.
(ii) To show that q₂ is not a profit maximizing level of output, we have taken q₃ output level, which is right of q₂.
(iii) Suppose the firm increases its output level from q₂ to q₃. The increase in total revenue of the firm from this output is the market price multiplied by the change in quantity (\(\triangle\) TR= market price x \(\triangle\)Q), that is, the area of rectangle q₂q₃CB.

(iv) On the other hand, the increase in total cost with this increase in output is the area of the region q₂q₃XW.
(v) But, a comparison of the two area shows that the firm's profit is higher when output level is q₂q₃ rather than %. So, % is not a profit maximizing level of output.
Case 2: Price Less Than MC
(i) In the given figure at output level q₂, the market price is less than marginal cost.
(ii) To show that %is not a profit maximizing level of output, we have taken q₃output level, which is left of q₂.

(iii) Suppose now, that the firm reduce its output level from q₂ to q₃. The decrease in total revenue of the firm from this output is the market price multiplied by the change in quantity (\(\triangle\)TR = market price x \(\triangle\)Q), that is, the area of rectangle q₂q₃CB.
(iv) On the other hand, the decrease in total cost with this decrease in output is the area of the region q₂q₃XW.
(v) But, a comparison of the two area shows, that by reducing the output from q₂ to q₃, the decrease in cost is more than the loss in revenue. So, q₂ is not a profit maximizing level of output.

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.

Generic 3

3 x 3 = 9

(i) The given statement is correct.
(ii) If MC is falling at the point of equilibrium, it means that it is possible to add to profits by producing more.
(iii) So, MC should be rising at the point of producer's equilibrium.

(i) When more output can be sold only by reducing the prices, AR or Price > MR.
(ii) Equilibrium is achieved when MC = MR.
(iii) So, Price is more than MC at the equilibrium level.

10.

No, as sufficient condition of producer equilibrium is Marginal Cost must be rising when Marginal Cost = Marginal revenue. It can be explained with the help of following diagram:

Point F is not a producer equilibrium because at this point, marginal cost = marginal revenue when marginal cost is falling. It is so because after point F, and output Q₁. MR[AQ₁]> MC [BQ₁], then producer will continue to produce as long as MR becomes equal to MC as firm will find it profitable to raise the output level.

1 Marks

4 x 1 = 4

11.

()
(i) MC = MR; and
(ii) MC curve cuts the MR curve from below (i.e., MC is rising).

12.

()
A producer is said to be in equilibrium when he produces that level of output at which his profits are maximum. Producer's equilibrium is also known as profit maximisation situation.

13.