Economics 3 Marks Question

The producer is in equilibrium when 4 units of output are produced. It is here that the difference between TR and TC is maximum, along with the fact that MR = MC, and MC is rising

Producer is in equilibrium when 3 units of output are produced, as it is here that MR = MC, and MC is rising

Profit is maximum when output level=3 units are produced, as it is here that the difference between TR and TVC is maximised. TVC = ΣΜC

TR: 6, 8, 10, 12, 14; TC: 8, 9, 10, 11, 8; Profit: -2, -1, 0, 1, 6

Profit = 1, 2, 4, 3, 3

Profit ₹ 30

Yes, we do agree with the statement that maximisation of profit implies equilibrium, but equilibrium does not always imply maximisation of profit. Profit is maximised when the difference between total revenue and total cost is maximum. But equilibrium can be struck even in the state of losses, when the two conditions are satisfied, ie, (i) MR=MC and
(ii) MC is rising.

Striking an equilibrium in a state of increasing returns to a factor (when MP is rising or MC is falling) is absolutely ruled out. Because it is a situation when every additional unit of output adds more and more to total profits. Reason: While MR is constant (under perfect competition) MC is falling (owing to increasing returns), so that the difference between MR and MC tends to rise. It is only when the difference (MR-MC) starts shrinking, and is finally eliminated, that the profits are maximised. This happens only in a state of diminishing returns when MP is falling or MC is rising.

Yes, it is rational for a producer to strike equilibrium when MC is rising, not when it is falling. When MC is falling, cost of producing an additional unit tends to fall. Other things remaining constant, it would lead to a rise in total profits. Why should a producer stop production when total profits are rising? It would not be a rational decision. The equilibrium will, therefore, be struck only when MC is rising, and is equal to MR.

Constant price means, AR is constant. If AR is constant, AR=MR. Both AR and MR are, therefore, indicated by a horizontal straight line, parallel to X-axis. When the law of variable proportions is operative, MC curve tends to be U-shaped: MC tends to decline corresponding to increasing returns, and it tends to rise corresponding to diminishing returns.
I will strike my equilibrium at a point when:
  (i) MR=MC, and (ii) MC is rising.
I may face two situations:
(i) MR > MC, and (ii) MR < MC.
How will I adjust my output?
For me, MR is constant in both the situations. So that the equality between MR and MC will be achieved only through changes in MC.
In situation 1, when MR > MC:
I would like to increase the level of output. This would cause increase in MC. The process of increasing output is to be continued till MR = MC.
In situation 2, when MR < MC:
I would like to decrease the level of output. This would cause decrease in MC. The process of decreasing output is to be continued till MR = MC.