Question

You are a manager of an apple orchard. For harvesting apple, you need to hire some workers. Worker is the variable factor and per worker wage is $40/day. Fixed cost of the orchard is $10 per day. You have been given the following information in relation to your apple harvesting: Workers per day Harvesting kg per day 0 0 1 100 2 275 3 460 4 620 5 755 6 860 7 920 8 960

a) Calculate marginal cost, average total cost and average variable cost.

b) Graph the three curves: marginal cost, average variable cost and average total cost curves in a single plane.

c) If the current wholesale price for apple is $0.30/kg, determine the profit maximisation level of output and show that on the graph. (3+1 marks)

d) Is the firm making profit or loss? Explain your answer. e) Calculate the profit or loss of the firm.

e) If the wholesale price of apple decreases from $0.30/kg to $0.25/kg, then calculate the firm’s profit/loss and make comments.

f) Based on the answer of (e) above, decide whether the firm should continue in business or shut-down the business. Explain why?

Answer 1

(a) The table is as below.

No. of workers (L)	Production (Q)	Variable Cost (VC)	Total Cost (FC+VC)	Average Cost	Average Variable Cost	Mrginal Cost
0	0	0	10	-	-	-
1	100	40	50	0.5	0.4	0.4
2	275	80	90	0.3273	0.2909	0.2286
3	460	120	130	0.2826	0.2609	0.2162
4	620	160	170	0.2742	0.2581	0.25
5	755	200	210	0.2781	0.2649	0.2963
6	860	240	250	0.2907	0.2791	0.381
7	920	280	290	0.3152	0.3043	0.667
8	960	320	330	0.3438	0.3333	1

The average cost is , while the marginal cost is and average variable cost will be .

(b) The graph is as below.

(c) If the price of apple is $0.3, the profit maximization output would be where the marginal cost is equal to the price & MC cuts the price line from below, which is occuring (approxly) at where quantity is 755 untis. This will be the profit maximization level of output. The graph is as below.

(d) The firm is making profit, since the price of $0.3 is above the AC at the profit maximizing quantity of 755. AC is $0.2781, while price is 0.3, and as price per product is greater than the cost per product, the firm is said to be making profit.

The profit will be , for TC* being the total cost at the profit maximizing quantity. The total cost at Q* is $210. Hence, the profit will be $ or $16.5.