Question

The accompanying table presents the expected cost and revenue data for the Tucker Tomato Farm. The Tuckers produce tomatoes in a greenhouse and sell them wholesale in a perfectly competitive market.

1. Fill in the firm’s marginal cost, average variable cost, average total cost, and profit schedules.(Round to two digits after the decimal point)

2. If the Tuckers are profit maximizers, how many tomatoes should they produce when the market price is $500 per ton? Indicate their profits.

3. Indicate the firm’s output level and maximum profit if the market price of tomatoes increases to $550 per ton.

4. How many units would the Tucker Tomato Farm produce if the price of tomatoes fell to $450 per ton? What would be the firm’s profits? Should the firm stay in business in the short-run? Explain.

Cost and Revenue Schedules for Tucker Tomato Farm, Inc.

	Output		Total		Price		Marginal		Average		Average		Profit
	(Tons Per		Cost		per Ton		Cost		Variable		Total Cost		(Loss)
	Month)								Cost
	0	$1,000		$500		---		---		---
	1	1,200		500
	2	1,350		500
	3	1,550		500
	4	1,900		500
	5	2,300		500
	6	2,750		500
	7	3,250		500
	8	3,800		500
	9	4,400		500
	10	5,150		500

Answer 1

Q	TC	P	MC	AVC	ATC	Profit
0	1000	500				-1000
1	1200	500	200	200.00	1200.00	-700
2	1350	500	150	175.00	675.00	-350
3	1550	500	200	183.33	516.67	-50
4	1900	500	350	225.00	475.00	100
5	2300	500	400	260.00	460.00	200
6	2750	500	450	291.67	458.33	250
7	3250	500	500	321.43	464.29	250
8	3800	500	550	350.00	475.00	200
9	4400	500	600	377.78	488.89	100
10	5150	500	750	415.00	515.00	-150

Profit = P x Q - TC

MC (nth unit) = TC (n units) - TC ((n-1) units)

AVC = VC/Q and ATC = TC/Q

VC = TC - FC (FC = 1000)

2)

Profit would be maximized when P > = MC for the last quantity produced

Q = 7 when P = 500

Profit = 250

3) P = 550

Q = 8 (same criteria as above)

Profit = 550 x 8 - 3800 = 600

4) P = 450

Q = 6 and Profit = - 50

Firm would stay in the business in the short run because P > min AVC (shutdown point) and it is able to recover some of its fixed costs.