Question

6. The figure above illustrates cost curves for a typical farmer growing and selling broccoli. She operates in a perfectly competitive market, and currently broccoli sells for $3 per pound. ATC AVC Quantity 0 1000 3000 5000 (a) What is the farmer's profit maximizing quantity of broccoli in the short run? Show it on the graph. The bank where the farmer financed the purchase of her land and home suddenly in- creases the interest rate on her adjustable-rate mortgage. She finds that her monthly mortgage payment is suddenly higher. (b) Which costs are affected (i.e., which curves shift) and why? Illustrate by shifting the appropriate curves. (c) How does this affect the farmer's decision of how much broccoli to produce? (d) How does this affect her profits? (e) What do you expect will happen in the long run in this market and to this particular farmer?

Answer 1

Answer to question parts (A) - (D)

6. A) a profit maximizing perfectly competitive firm produces at the point where market price is equal to MC.

Therefore, this farmer's profit maximizing quantity of broccoli in the short run is 6000 pounds.

B) Mortgage payment falls under fixed cost, because it doesn't change from period to period.

Therefore, the farmer's AFC will increase but AVC will not change, thereby increasing his ATC. ATC curve shifts upward. As Total cost increases, marginal cost (marginal cost is the change in total cost caused by one unit increase in the output) in this case will not increase because change in TC is caused by change in FC, not by change in VC.

C) AS price and MC doesn't Change, therefore the farmer will still produce 6000 pounds.

D) As the farmer's TC increases due to increase in Fixed cost, therefore his profit (total revenue - total cost) will decrease.