Question

Question 2 (18) In scenario 1, Kobus specialises in the production of two products, namely apples and honey. With reference to Humming Honey, answer the following questions: 2.1 With reference to the (per box) production of Humming Honey, differentiate between marginal cost, marginal revenue and marginal production. (3) 2.2. In the short run, the farmer's costs in the production of Humming Honey consist of fixed costs and variable costs. Using your knowledge of cost formulas and calculations, redraw and complete the table below. (4) Total Total Average Average Average Quantity Fixed Total Marginal Variable Fixed Variable Total Cost Cost (Q) Cost Cost Cost Cost Cost (TFC) (TVC) (TC) (AFC) (MC) (AVC) (ATC) 0 3770 0 3 770 0 0 0 0 3770 150 3 920 3 770 150 3 920 150 3770 240 4 010 120 2005 90 3 290 4 060 1 256.67 96.67 1 353.33 50 4 3 770 340 4 110 942.5 1 027.5 50 3 770 410 4 180 754 82 70 6 3 770 570 4 340 628.33 95 723.33 160 7 3770 4 290 538.57 74.29 612.86 -50 1 2 5 8 3 770 600 4 370 75 80 471.25 418.89 546.25 501.11 9 3 770 740 4 510 82.22 140 10 3 770 860 4 630 377 86 463 120 11 3 770 910 342.73 82.73 425.45 12 3770 1 000 4 680 4 770 4 970 314.17 83.33 397.5 90 13 3 770 1 200 92.31 382.31 200 14 3 770 1 450 5 220 103.57 372.56 269.29 251.33 15 3770 1 850 5620 123.33 374.67 400 2.3. 2.4. Kobus can increase the total revenue of Humming Honey by increasing the price. Is the demand for honey elastic or inelastic? Justify your answer. (2) Using the calculated cost of honey production in Question 2.2 and the calculated revenue for honey based on combinations B, C, D and E in Question 1.4, determine which combination will maximise the profit of honey. (5) The cross-price elasticity for tea has a value of -1.23. Explain the following to Kobus: 2.5.1. The type of product that tea is in relation to honey (2) 2.5.2. What will happen to the demand for honey if the price of tea increases (2) 2.5.

Answer 1

2.1 Marginal cost is the change in total cost of production due to an additional output. Suppose the total cost of producing 9 boxes of Honey is 4510. The total cost of 10 boxes is 4630. The change in total cost due to the production of an additional box of honey is 120. So the marginal cost of 10th box of honey is 120.

Marginal Revenue is the change in Total revenue by selling an additional output. Suppose the total revenue from 9 boxes of Honey is 560*9= 5040. The total revenue from 10 boxes is 5600. The change in total revenue due to the sale of an additional box of honey is 560. So the marginal revenue of 10th box of honey is 560.

Marginal production is change in total production due to employment of an additional input. Suppose 18 workersare employed and they produce 9 boxes of Honey. If they employ 19 workers and these 19 workers produce 11 boxes of honey. So the marginal production by 19th worker is 2 boxes.

2.2 ( I AM COMPLETING THE ROWS WITH BLANKS IN THEM & HIGHLIGHTED NUMBERS ARE THE ANSWERS)

Quantity	TFC	TVC	TC	AFC	AVC	ATC	MC
2	3770	240	4010	1885	120	2005	90
3	3770	290	4060	1256.67	96.67	1353.33	50
4	3770	340	4110	942.5	85	1027.5	50
5	3770	410	4180	754	82	836	70
7	3770	520	4290	538.57	74.29	612.86	-50
11	3770	910	4680	342.73	82.73	425.45	50
13	3770	1200	4970	290	92.31	382.31	200
14	3770	1450	5220	269.29	103.57	372.56	250

2.3 If the demand of a good is inelastic , then the percentage decrease in its demand is less than percentage increase in its price . Suppose price of a box is $1, quantity demanded is 4 boxes. Now price increases to $2., means a 100% increase in price . The demand will fall less than 100% because demand is inelastic.  Suppose quantity demanded is , say, 3 boxes. Before price change total revenue was $4. After price increase, total revenue is $ 6. So price increase increases total revenue. So the demand for Honey is inelastic.

2.4 P= 560

Point of production	QUANTITY OF HONEY BOXES PRODUCED	TR(P*Q)	TC	PROFIT( TR- TC )
B	3	1680	4060	-2380
C	6	3360	4340	-980
D	9	5040	4510	530
E	12	6720	4770	1950

Combination E will maximise the profit of honey.

2.5

2.5.1Cross- price elasticity is the percentage change in demand of one good due to a percentage change in price of other good. If the cross price elasticity is negative, it means the two goods are complementary goods. Complementary goods are usually consumed together.  A fall in price of one good, increases the demand of that good and consequently increases the demand of its complementary good too. Since the cross price elasticity of tea is negative, tea and honey are complementary goods.

2.5.2 If the price of tea increases, its demand will fall. Since tea and honey are complementary goods, the demand for honey will fall too.