Question

Table 7.3 Farmer Jones' profits from oats farming QUANTITY (BUSHELS) TOTAL REVENUE (TR) TOTAL COST (TC) PROFIT (TR- TC) MARGINAL REVENUE (MR) MARGINAL COST (MC) $0.00 $1.00 -$1.00 4.00 4.00 0.00 $4.00 $3.00 8.00 6.00 2.00 4.00 2.00 12.00 7.50 4.50 4.00 1.50 16.00 9.50 6.50 4.00 2.00 20.00 12.00 8.00 4.00 2.50 24.00 15.00 9.00 4.00 3.00 28.00 19.50 8.50 4.00 4.50 32.00 25.50 6.50 4.00 6.00 36.00 32.50 3.50 4.00 7.00 40.00 40.50 -0.50 4.00 8.00

Answer 1

What is fixed cost?

$1.

Explanation : at 0 quantity, total cost equals fixed cost. Because fixed cost doesn't changes with output.

Will this increase in fixed cost change profit maximising level of output?

No.

Profit maximising output is decides on the basis of where marginal revenue equals marginal cost. marginal cost is the extra cost occurred with the production of one more extra unit.

Fixed cost have no impact on marginal cost because total cost increase with the same dollar ar every level of output. Thus profit maximising quantity will remain same.

How much profit will farmer makes now.

$8.

Explanation :

Firm maximises it's profit where MR equals MC and here at any quantity MR is not equal to MC so, firm will choose quantity where MR is greater than MC before MR starts less than MC. Here profit maximising quantity will be 6.

So when fixed cost increase, total cost will be increase by 1.

Now total cost =15+1=16.

Profit =TR-TC

=24-16

=8.