70$ The demand for olive oil is given in columns (1) and (2) of the table. Assum

Question

70$

The demand for olive oil is given in columns (1) and (2) of the table.

Assume the Long-Run Average Total Cost of producing a gallon of olive oil is constant at $20 per gallon.

Assume the Long Run Marginal Cost of producing a gallon of olive oil is constant at $20 per gallon

(A) Complete columns (3) – (7) in the table above for Total Revenue, Marginal Revenue, Total Cost, Marginal Cost, and Economic Profit.

(B) Producers of olive oil experience (complete the correct answer)

Decreasing returns to scale/diseconomies of scale because_______________.

Increasing returns to scale/economies of scale because _________________.

3.   Constant returns to scale because _____________________________.

Price Per Gallon Quanity Demanded a Year (Millions of gallons) Total Revenue Total Cost Marginal Revenue Marginal Cost Economic Profit 20$ 10.00M $200M $200M NA NA $0 30$ 9.00M 40$ 8.00M 50$ 7.00M 60$ 6.16M

70$

4.50M 80$ 3.50M

Explanation / Answer

TR = P x Q
TC = 20 x Q (in $ mn)

MR (nth unit) = (TR (n units) - TR ((n-1) units))/ (Qn - Qn-1)

MC (nth unit) = (TC (n units) - TC ((n-1) units))/ (Qn - Qn-1)

Economic profit = TR - TC

Producers of olive oil experience:

Constant returns to scale because average cost remains constant over the production range. (AC = $20 per gallon)

Price Per Gallon ($) Quanity Demanded a Year (Millions of gallons) Total Revenue ($ mn) Total Cost ($ mn) Marginal Revenue ($ mn) Marginal Cost ($ mn) Economic Profit ($ mn) 20 10 200 200 NA NA 0 30 9 270 180 -70 20 90 40 8 320 160 -50 20 160 50 7 350 140 -30 20 210 60 6.16 369.6 123.2 -23.33 20 246.4 70 4.5 315 90 32.89 20 225 80 3.5 280 70 35 20 210

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