Question

In: Economics

Given the information below about Farmer Sally’s wheat crop, fill in the table below and calculate her economic profit or loss when the market price is $3 per bushel.

Given the information below about Farmer Sally’s wheat crop, fill in the table below and calculate her economic profit or loss when the market price is $3 per bushel. Hint: Recall that MR = P under perfectly competitive conditions.

Bushels of wheat

MR

TR

TC

MC

VC

ATC

AVC

Economic Profit or Loss

0



15.00

--

0

--

--


1




4.75





2




3.75





3




3.00





4




2.50





5




2.00





6




1.50





7




1.25





8




1.50





9




2.00





10




2.75





11




3.25





12




4.75





13




6.50





14




9.50





15




13.50





16




18.50





  1. Graph Total Cost and Total Revenue on one graph and show the optimal point (either profit maximization or loss minimization).

  2. Graph MC, ATC, AVC, and MR on one graph and show the optimal point (either profit maximization or loss minimization). Shade in the area of profit or loss.

  3. If the price increased to $5 per bushel, what would be the economic profit or loss? How many bushels of wheat would Sally choose to produce?

  4. What is Sally’s shutdown point? Answer this question in terms of both a minimum price that she would have to get in order to produce and a minimum quantity that she would be willing to make at the minimum price.

Solutions

Expert Solution

The table:

Bushels of wheat MR TR TC MC VC ATC AVC Economic Profit or Loss
0 0 0 15 -- 0 -- -- -15
1 3 3 19.75 4.75 4.75 19.75 4.75 -16.75
2 3 6 23.5 3.75 8.5 11.75 4.25 -17.5
3 3 9 26.5 3 11.5 8.83 3.83 -17.5
4 3 12 29 2.5 14 7.25 3.5 -17
5 3 15 31 2 16 6.2 3.2 -16
6 3 18 32.5 1.5 17.5 5.4 2.9 -14.5
7 3 21 33.75 1.25 18.75 4.82 2.6 -12.75
8 3 24 35.25 1.5 20.25 4.4 2.53 -11.25
9 3 27 37.25 2 22.25 4.1 2.47 -10.25
10 3 30 40 2.75 25 4 2.5 -10
11 3 33 43.25 3.25 28.25 3.93 2.5 -10.25
12 3 36 48 4.75 33 4 2.75 -12
13 3 39 54.5 6.5 39.5 4.19 3.0 -15.5
14 3 42 64 9.5 49 4.57 3.5 -22
15 3 45 77.5 13.5 62.5 5.1 4.1 -32.5
16 3 48 96 18.5 81 6 5.06 -48

a, The graph of TR and TC:

The loss minimizing point is when output =10 units.

b. The graph of MC, ATC, AVC, MR:

  

The area of loss is shaded. Output is where MC = MR, happens between 10 and 11.(at around 10.5) quantity.

c. If price = $5:

Output is where MC = MR = 5. Output is a little over 12. As price is more than ATC, there is profit represented by the yellow shaded region.

d. When quantity = 1 or 10, MC = AVC. That is the shutdown price. This is because, Sally will just abou coer heer cost of production. She will charge a minimum price of $4.75 (at output = 1) or $2.50 (at output = 10), which is equal to her AVC.


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