6 mark question

1)what is meant by producer's equilibrium ? when will a producer be in equilibrium in case of losses

2)show that a perfectly competitive firm maximises its profit only when price =mc.

3)why should mc curve be rising in a situation of producer's equilibrium?

4) for a firm under perfect competiton , profits are not maximised even when mr mc . explain why.

Solution 1

Producer’s Equilibrium refers to the state where a producer is earning maximum possible profit by producing a particular level of output. This state is referred to as 'equilibrium' because a producer has no incentive to move away from this point, as such deviation will reduce his/her profit.

In case a firm is incurring losses, the producer will reach its equilibrium at the point where the price is equal to or greater than the minimum of short run average variable cost curve (SAVC). This is because if a producer is incurring losses then he must be selling his product at a price lower than the minimum of SAVC. Thus, in order to reach equilibrium, he will have to sell the output at a price that is equal or greater than the minimum of SAVC.

For better understanding of this topic you can also refer to Microeconomics- The Theory of Firm Under Perfect Competition (Lesson 3) of our study material.

Solution 2 and 3

The answer to the concerned questions has been covered in our study material. You can find it in Microeconomics- The Theory of Firm Under Perfect Competition (Lesson 3) of our study material.

Solution 4

Under perfect competition, if a firm is not able to maximise its profit even after producing at a level where MR=MC, then it may be a case where the price (MR) is less than the minimum of SAVC. In such a situation, the firm will not be able to maximise its profit and rather will incur losses.

This situation is explicitly and extensively covered in our study material. You can find it in Microeconomics- The Theory of Firm Under Perfect Competition (Lesson 3) of our study material.