When does producer gets equilibrium when using total cost and total revenue curves is _
a. Total cost and total revenue curves have same slope
b. All of the above
c. Additional unit of output decreases profit
d. Vertical distance between total cost and total revenue curves is maximum
The correct answer and explanation is:
The correct answer is d. Vertical distance between total cost and total revenue curves is maximum.
In economics, a producer reaches equilibrium when the difference between total revenue (TR) and total cost (TC) is maximized. This maximum difference represents the highest possible profit. To understand this, consider the total cost and total revenue curves, which show how cost and revenue change with the level of output.
- Total Cost Curve (TC): This curve typically increases as production increases. It includes both fixed and variable costs. Initially, the slope of the TC curve increases at a decreasing rate (due to economies of scale), but after a certain point, it starts increasing at an increasing rate because of diminishing returns to scale.
- Total Revenue Curve (TR): This curve also increases as output increases, but at a constant or gradually increasing rate. It represents the revenue earned from selling the output at a given price.
- Equilibrium Point: The equilibrium is reached when the vertical distance between the total revenue and total cost curves is maximized. This is where the producer earns the highest profit. The vertical distance is simply the difference between total revenue and total cost. The greater this distance, the more profit the producer makes. When this distance is at its largest, the producer cannot increase profit by producing more output. After this point, increasing production would only increase total costs faster than total revenue, reducing profits.
In simpler terms, the equilibrium point corresponds to the output level where profit is maximized, and the difference between total revenue and total cost is the largest. Beyond this point, producing more would lead to diminishing returns, and additional units of output would decrease profit. Therefore, the correct answer is d.