The following table shows the revenue and costs of a Parrot farmer in a perfectly competitive industry. Table 1 Quantity of Parrots harvested: 0, 1, 2, 3, 4, 5, 6, 7, 8, 9, 10 Total Revenue ($): 0, 10, 20, 30, 40, 50, 60, 70, 80, 90, 100 Total Cost ($): 3, 5, 9, 15, 23, 33, 45, 59, 75, 94, 115 MR: MC: a) Fill in the values for MR and MC in Table 1 b) How much is total fixed cost for this Parrot farmer? Why? c) If the farmer chooses to maximise profit, what would marginal cost be equal to and what would be the ‘range’ for the appropriate output level? Why? d) What is the maximum profit available to this farmer’s firm? e) If the market price of Parrots fell below $10 in the market then what should the farmer do in the short run? What about the long run?
Question
The following table shows the revenue and costs of a Parrot farmer in a perfectly competitive industry. Table 1 Quantity of Parrots harvested: 0, 1, 2, 3, 4, 5, 6, 7, 8, 9, 10 Total Revenue (): 3, 5, 9, 15, 23, 33, 45, 59, 75, 94, 115 MR: MC: a) Fill in the values for MR and MC in Table 1 b) How much is total fixed cost for this Parrot farmer? Why? c) If the farmer chooses to maximise profit, what would marginal cost be equal to and what would be the ‘range’ for the appropriate output level? Why? d) What is the maximum profit available to this farmer’s firm? e) If the market price of Parrots fell below $10 in the market then what should the farmer do in the short run? What about the long run?
Solution
a) Marginal Revenue (MR) is the additional revenue that an extra unit of product will bring. It is calculated as the change in total revenue divided by the change in quantity. In a perfectly competitive market, MR is constant and equal to the price of the product. In this case, it is $10 for each parrot.
Marginal Cost (MC) is the cost of producing one more unit of a good. It can be calculated as the change in total cost divided by the change in quantity. The MC for each quantity level would be: -, 2, 4, 6, 8, 10, 12, 14, 16, 19, 21.
b) Total fixed cost (TFC) is the cost that does not change with the level of output. It can be calculated as the total cost when the output is zero. In this case, the TFC is $3.
c) To maximize profit, the farmer should produce up to the point where marginal cost (MC) equals marginal revenue (MR). In this case, MC = MR at a quantity of 5 parrots. The range for the appropriate output level would be 0 to 5 parrots.
d) The maximum profit is calculated as total revenue minus total cost at the profit-maximizing output level. In this case, the maximum profit is 33 = $17.
e) If the market price of parrots fell below $10, in the short run, the farmer should continue to produce as long as the price covers the variable cost. If the price is lower than the average variable cost, the farmer should shut down in the short run. In the long run, if the price is lower than the average total cost, the farmer should exit the industry.
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