Question

|M4 Questions of the Week 1. Hayfever Farms is an 80-acre hay farm in Colorado. Due to the legalization of marijuana in the state, the owners of the farm are considering changing the farm's name to Blissful Acres and growing marijuana instead of hay. Use the information presented in the table to answer three questions. Number of acres 10 20 30 40 50 60 70 80 MC$ 320 200 540 730 1,200 3,200 5,600 6,700 MR (hay) 730 730 730 730 730 730 730 730 MR (marijuana) 5,600 5,600 5,600 5,600 5,600 5,600 5,600 5,600 a) If they continue to grow only hay, how many acres should Hayfever Farms devote in order to maximize profits? Explain your answer. b) If the owners decide to grow only marijuana, how many acres should they devote in order to maximize profits? Explain. c) Suppose that the government decides to place a “sin tax” on marijuana sales. This tax causes the MR of marijuana to fall to $4,800 for all acres of land. Does this change the number of acres that Blissful Acres should devote to marijuana production? Why or why not? d) Suppose that Blissful Acres gets purchased by new owners that are committed to the ethical treatment of the environment and to workers. They adopt new growing methods that cost a bit more, but are less damaging to the environment. And, they commit to paying their workers an ethical wage. As a result, the MCs per acre farmed increase (see the table below). If they cannot charge more for their marijuana, what is the new profit maximizing number of acres devoted to marijuana? Explain your answer.

Answer 1

Part a

As per rule the Profit Maximizing Output occurs at level where MR = MC. In case of Hay MR = MC = $730 at 40 acres of land. So, profit Maximizing Output is 40 acres.

Part b

In case of Marijuna, MR = MC = $5600 at 70 acres of land. So, profit Maximizing Output is 70 acres.

Part c

Yes, imposition of Sin tax will result in fall of MR to $4800 and this will affect the profit maximizing output. The profit maximizing output occurs at level where MR = MC or MR > MC. Here till 60 acres MR of Marijuna is greater than MC as $4800 > $3200. So, Profit Maximizing Output will change to 60 acres. After this MC exceeds MR.

Part d

Cannot be answered because new table is missing.