Brenda Smith operates her own farm raising chickens and producing eggs. She sell
ID: 1139767 • Letter: B
Question
Brenda Smith operates her own farm raising chickens and producing eggs. She sells her eggs at the local farmers market where there are several other egg producers also selling eggs by the dozen. (Brenda operates in a perfectly competitive market in which she is a “price taker.”) In order to make sure she does not lose money on selling eggs, she does an analysis of her costs for producing eggs as shown on Table 3.
Table 3
Dozens of eggs
Fixed Cost
Total Cost
Variable Costs
Average Variable Costs per dozen
Average Total Costs per dozen
0
$3.35
$3.35
n/a
n/a
n/a
10
$3.35
$10.50
$7.15
$0.72
$1.05
20
$3.35
$16.40
$13.05
$0.65
$0.82
30
$3.35
$23.10
$19.75
$0.66
$0.77
40
$3.35
$30.00
$26.65
$0.67
$0.75
50
$3.35
$36.50
$33.15
$0.66
$0.73
60
$3.35
$48.00
$44.65
$0.74
$0.80
70
$3.35
$64.40
$61.05
$0.87
$0.92
80
$3.35
$80.00
$76.65
$0.96
$1.00
90
$3.35
$135.00
$131.65
$1.46
$1.50
If the market price of a dozen eggs at the local farmers market is 72 cents per dozen, should Brenda continue producing eggs in the short-run? Explain how you determined your answer.
If the market price of a dozen eggs at the local farmers market is 64 cents per dozen, will Brenda make an economic profit? Explain how you determined your answer.
If the market price of a dozen eggs at the local farmers market is 64 cents per dozen, should Brenda continue producing eggs in the short-run? Explain how you determined your answer.
Table 3
Dozens of eggs
Fixed Cost
Total Cost
Variable Costs
Average Variable Costs per dozen
Average Total Costs per dozen
0
$3.35
$3.35
n/a
n/a
n/a
10
$3.35
$10.50
$7.15
$0.72
$1.05
20
$3.35
$16.40
$13.05
$0.65
$0.82
30
$3.35
$23.10
$19.75
$0.66
$0.77
40
$3.35
$30.00
$26.65
$0.67
$0.75
50
$3.35
$36.50
$33.15
$0.66
$0.73
60
$3.35
$48.00
$44.65
$0.74
$0.80
70
$3.35
$64.40
$61.05
$0.87
$0.92
80
$3.35
$80.00
$76.65
$0.96
$1.00
90
$3.35
$135.00
$131.65
$1.46
$1.50
Explanation / Answer
1) The decision rule for the firm to decide whether to the produce in the short run is that the price of the good should be atleast greater than or equal to minimum average variable cost. If the price is above this level then the firm will be able to cover some of its fixed cost, but if the price falls below this level then the firm will incur a loss which is greater than it is fixed cost and so the firm should stop producing (if the firm will not produce then itt will incur a loss that is equal to the fixed cost and not greater than this).
When the price of eggs is $0.72, then this price is greater than the minimum average variable cost of $0.65 and so Brenda should continue producing eggs.
2) For making economc profit, the price should be greater than the average total cost of production. When the price is equal to $0.64, then Brenda will not make an economic profit because it is always less than the average total cost of production. .
3) By applying the same reasoning as in part (1) , since the price of $0.64 is less than the the minimum average variable cost of $0.65 so Brenda should stop producing eggs in the short run.
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