Q.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.

A firm maximizes its profit when it produces at an output level where two conditions are met:

1. Marginal Revenue (MR) equals Marginal Cost (MC).
2. Marginal Cost (MC) is rising at the point of equilibrium.

To determine the firm's equilibrium, we first calculate Marginal Revenue (MR) and Marginal Cost (MC) from the given Total Revenue (TR) and Total Cost (TC) schedules. MR is the change in TR from producing one more unit, and MC is the change in TC from producing one more unit.

From the schedule:

• At Output 5, Marginal Revenue ($MR = ₹20$) is equal to Marginal Cost ($MC = ₹20$). Thus, the first condition ($MR = MC$) is satisfied. …

A firm's primary objective is to maximize its economic profit. Profit is the difference between total revenue (TR) and total cost (TC). To determine the output level that achieves this, firms use the marginal revenue (MR) and marginal cost (MC) approach. This approach focuses on the additional revenue and additional cost generated by producing one more unit of output.

The economic intuition behind the MR=MC rule is straightforward:

• If the additional revenue from selling one more unit (MR) is greater than the additional cost of producing that unit (MC), the firm should produce that unit because it adds to total profit.
• If MR is less than MC, producing that unit would reduce total profit, so the firm should not produce it.
• Therefore, the firm should continue to produce as long as MR is greater than or equal to MC, stopping precisely at the point where MR equals MC. At this point, no further unit can add to profit, and producing less would mean foregoing potential profit.

There are two conditions for profit maximization using the MR=MC approach:

1. First Order Condition: Marginal Revenue (MR) must be equal to Marginal Cost (MC).

   $MR = MC$

2. Second Order Condition: At the point where MR = MC, the Marginal Cost (MC) curve must be rising (or MC must cut MR from below). This ensures that the firm is at a maximum profit point, not a minimum loss point.

To apply this approach, we first need to calculate Marginal Revenue (MR) and Marginal Cost (MC) from the given Total Revenue (TR) and Total Cost (TC) schedule.

• Marginal Revenue (MR) is the change in total revenue resulting from producing one more unit of output.

  $MR = \frac{\Delta TR}{\Delta Q}$

• Marginal Cost (MC) is the change in total cost resulting from producing one more unit of output.

  $MC = \frac{\Delta TC}{\Delta Q}$

Let's construct a table to calculate MR, MC, and Profit (TR - TC) for each level of output:

Now, let's analyze the table to find the equilibrium output:

• At Output 1 unit: Profit is ₹0. MR and MC are not applicable as they represent changes from a previous unit.
• At Output 2 units: MR is ₹20, and MC is ₹10. Since MR > MC (₹20 > ₹10), the firm can increase its profit by producing more. Profit increases from ₹0 to ₹10.
• At Output 3 units: MR is ₹20, and MC is ₹6. Since MR > MC (₹20 > ₹6), the firm should produce more. Profit increases from ₹10 to ₹24. …