1. An alternative energy researcher specializing in deriving oil from algae is c
ID: 1127349 • Letter: 1
Question
1. An alternative energy researcher specializing in deriving oil from algae is constructing a building in Florida to take advantage of the higher levels of sunlight, temperatures, and humidity necessary to foster the growth of algae. The building is a specialized building that will have climate-controlled rooms as well as very high levels of insulation to maintain a steady temperature. It will also have an extensive array of solar panels on the roof to create more lighting and higher temperatures and humidity for algae growth. Answer the following questions regarding his move:
a. Once the building is constructed, would you consider this building to be a “sunk cost” or a cost that could be recoverable in the future when it is sold? Explain your response.
b. From the standpoint of risk and reward, does an elaborate building specifically designed for algae production and alternative energy research seem like a speculative venture or a sound investment given the uncertain nature of the research outcomes?
c. One of the problems with incurring costs, sunk or otherwise, is that ultimately all costs must be recovered or a firm will go out of business. What is the unique situation regarding cost recovery for a research operation such as this? Explain.
2. A Canadian farm family is growing “rapeseed,” also referred to as canola, which will be processed into canola oil and shipped to US markets where fast-food restaurants and consumers are using vast quantities of the product. Canadian farmers generally operate in a perfectly competitive market.
a. Explain the concept of a “price-taker” and how a Canadian farmer is relegated to the role of a price-taker.
b. Explain how a canola farm family perceives the demand curve for their product given their role as price-takers.
c. Explain why a profit-maximizing farm family would have a supply curve that was identical to the marginal cost curve of the operation.
3. There are generally two ways for the farm family in Question #2 to maximize profitability in their operation, either by operating at the point at which marginal revenue equals marginal costs, or alternatively, operating by maximizing the difference between Total Revenue and Total Costs.
a. Explain the practical deficiencies for this farm family in using the “marginal revenue equals marginal cost approach” to maximize profitability.
b. Given the fact that the farm family produces a commodity and they are price-takers in a perfectly competitive environment, what might be the best strategy for success (i.e. maximizing profitability) in attempting to deal with these commodity prices over which they have no control?
c. How would economies of scale and/or scope affect the farm family’s ability to be profitable in such a competitive market? Would it play a role at all? Explain.
Explanation / Answer
Can answer only four parts according to chegg policy. Please send other parts as separate question
a price taker is one who takes market price as given. It is relegated to role of price taker because market structure is competitive. There are large no. of sellers and buyers and products are identical. If it chooses to raise price it will loose all customers to rival farmers
2 They take their demand curve as horizontal line. The can't lower price to increase demand or raise price. They can sell all output at given price
C supply curve will be identical to marginal cost curve because in equilibrium price or marginal revenue =marginal cost. Thus the firm produces by moves up or down along a given mc curve. But only that part of marginal cost curve is supply curve which is above average variable cost curve
D practical deficiencies in using marginal cost marginal revenue concept of profit maximisation is that it is difficult to measure practically marginal cost and marginal revenue. Firm can't easily sell output in one units separately each time to know marginal revenue. Rather the quantities are sold in bulk say e. g 15 litres at a time. Similarly it is difficult to vary output by one unit only at a time to know marginal cost. The farmer doesn't produce 1 kilogram of rapeseed separately rather in one farm he producers many kilograms simultaneously and thus he can't measure marginal cost easily.
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