Question

1)for this farmer to maximize profits, he should produce___bushels of wheat. explain

2) farmer fixed costs are___. how could you find these?

3) if this farmer maximizing profit, his profit will be__. explain

4) this farmer would earn a zero economicc profit price was___ explain

Cost and demand conditions M MC ATC AVC d = MR ū7 Price per bushel + 1 i II | | | | | | | | 3 9 6 9 12 16 17 Bushels of wheat

Answer 1

1) A profit maximizing perfectly competitive firm produces at the point where price = MC. And, for a perfectly competitive firm, as demand is perfectly elastic, therefore d = MR = price.

For this farmer to maximize profits, he should produce 12 bushels of wheat.

2) At the profit maximizing quantity of 12 bushels, ATC = $11, that is, Total cost = ATC * quantity = $(11 * 12) = $132. And, AVC = $9, that is, variable cost = AVC * quantity = $(9*12) = $108.

Fixed cost = TC - VC = $(132 - 108) = $24

3) At the profit maximizing output Level, Total revenue = price * quantity = $(15*12) = $180 and TC = $132.

Therefore, profit = TR - TC = $(180 - 132) = $48

4) If at the profit maximizing output level, price = ATC, that is, Total revenue = total cost, then the firm will earn 0 economic profit. This happens when price = minimum ATC .

Therefore, this firm would earn a 0 economic profit if price was $10 per bushel.