Question

Suppose Sam moves to a new house with an existing apple tree that has six branches, one apple per branch. Sam doesn't know it, but there's a cliff behind the tree whose top sit at the 5th branch and makes it possible to grab pick the apples from branches 4, 5, 6 from the safe, grassy top of the cliff. The cliff top is only visible once you've climbed past the third branch. Sam would have to get back on the tree to climb to branches 7 and 8, which still frightens him quite a bit.

The market price of an apple is $0.50.

(a) (10 points) Complete the following table.

Apples	Total Cost	Marginal Cost	Marginal Revenue	Change in Profit
1	$0.22	$0.22	$0.50	$0.28
2	$0.50
3	$1.00
4	$0.50
5	$0.22
6	$0.50
7	$1.73
8	$2.78

(b) What is happening to the marginal cost of apples?

(c) Suppose Sam got an A+ in his principles of microeconomics class. Will Sam stop picking apples after the third branch if he doesn’t know about the existence of the cliff?

(d) How many apples should Sam pick if he knows about the cliff?

(e) How much profit does Sam lose if he stops picking apples after the third branch?

Answer 1

a) Market price =0.50$

Marginal Cost= Change in Total Cost/ Change in Quantity

MR is the same the price

Change in profit is the difference in profit

Profit = TR-TC

TR= P*Q

apples	TC	MC	MR	Change in Profit
1	0.22	0.22	0.50	0.28
2	0.50	0.28	0.50	0.22
3	1.00	0.50	0.50	0
4	0.50	-0.5	0.50	1
5	0.22	-0.28	0.50	0.78
6	0.50	0.28	0.50	0.22
7	1.73	1.23	0.50	-0.73
8	2.78	1.05	0.50	-0.55

b) Marginal Cost if fluctuating over the period. Marginal cost represents the additional cost incurred by adding one more unit. Intitally the MC increases and then the MC decreases.

c) As a rational producer Sam should stop producing at the third unit where his MR=MC and he is at equilibrium. 3rd branch is his equilibrium level

d) If Sam knows about the cliff he should pluck 5 apples where his profit is high and MC is low and TC is low as well.

e) If sam stops at 3rd branch his profit is 0.50$ and the change in profit over the previous level is 0