Economics 101 L
Homework No. 8
(due in lab on Oct. 27, 2008 for sections 1&3, Oct. 29 for section 2)
Question 1
The following table contains data corresponding to a competitive firm that uses corn to produce chicken.
Corn(tons) / Chicken
(tons)
3,000 / 1,550
4,000 / 2,500
5,000 / 3,300
6,000 / 3,950
7,000 / 4,400
8,000 / 4,700
9,000 / 4,900
10,000 / 5,000
a. Assume that the firm can sell chicken at $300/tn:
i. Complete the following table by calculating the firm’s total revenue and marginal revenue product curves.
Corn(tons) / Chicken
(tons) / Total Revenue
($) / Marginal Revenue Product
($/tn of corn)
3,000 / 1,650
4,000 / 2,500
5,000 / 3,300
6,000 / 3,950
7,000 / 4,400
8,000 / 4,700
9,000 / 4,900
10,000 / 5,000
ii. If the firm must pay $90/tn of corn, how much corn will it use?
iii. If the price of corn drops to $60 per ton, how much corn will it use?
iv. If the price of corn increases to $135 per ton, how much corn will it use?
b. Now suppose that the price of chicken falls to $200 per ton.
i. Complete the following table by calculating the firm’s total revenue and marginal revenue product curves.
Corn(tons) / Chicken
(tons) / Total Revenue
($) / Marginal Revenue Product
($/tn of corn)
3,000 / 1,650
4,000 / 2,500
5,000 / 3,300
6,000 / 3,950
7,000 / 4,400
8,000 / 4,700
9,000 / 4,900
10,000 / 5,000
ii. If the firm must pay $90/tn of corn, how much corn will it use?
iii. If the price of corn drops to $60 per ton, how much corn will it use?
iv. If the price of corn increases to $135 per ton, how much corn will it use?
c. In a graph with corn on the horizontal axis and price and marginal revenue product (MRP) on the vertical axis, draw the firm’s demand for corn when the price of chicken is $300/tn and when the price of chicken is $200/tn. How does the fall in the price of chicken affect the firm’s demand for corn?
Question 2.
A poultry producer’s short-run production is given in the following table:
Input(units of corn) / Output
(units of chicken) / Average Product
(units of chicken per unit of corn) / Marginal Product
(units of chicken per unit of corn)
0 / 0 / ------
1 / 7 / ------
2 / 18 / ------
3 / 33 / ------
4 / 50 / ------
5 / 65 / ------
6 / 78 / ------
7 / 87.5 / ------
8 / 92 / ------
9 / 92.7 / ------
The price per unit of corn is $10. In addition, the poultry producer has fixed costs of $30.
a) Calculate the marginal product and the average product for each level of corn usage.
b) Graph the marginal product and average product curves calculated in (a) with input on the horizontal axis.
c) In the graph constructed in (b), identify the regions with increasing marginal product and with diminishing marginal product.
d) Calculate the firm’s total fixed cost (TFC), total variable cost (TVC), and total cost (TC) of producing chicken.
e) Calculate the firm’s marginal cost (MC), average fixed cost (AFC), average variable cost (AVC), and average total cost (ATC) of producing chicken.
Input(units of corn) / Output
(units of chicken) / TFC
($) / TVC
($) / TC
($) / AFC
($/unit of chicken) / AVC
($/unit of chicken) / ATC
($/unit of chicken) / MC
($/unit of chicken)
0 / 0 / ------
1 / 7 / ------
2 / 18 / ------
3 / 33 / ------
4 / 50 / ------
5 / 65 / ------
6 / 78 / ------
7 / 87.5 / ------
8 / 92 / ------
9 / 92.7 / ------
f) Graph in excel AFC, AVC, ATC, and MC calculated in (e):
g) Suppose that the market for chicken is perfectly competitive, and that the price of chicken is $2.10 per unit.
1) What is the firm’s marginal revenue?
2) Add a column for marginal revenue product (MRP) and compute for each level of input.
3) How many chicken units should the firm produce to maximize profits?
Question 3
The graph below illustrates a hypothetical competitive firm facing varying prices in the market for wheat where annual output is graphed on the horizontal axis and the price of wheat is on the vertical axis.
a) On graph paper, draw the firm’s short run supply curve remembering to consider shut down price. Also remember to label your axes.
b) What is the firm’s shut down price (i.e. Below what price will this firm produce no wheat in the short run)?
c) Calculate the economic profit (or loss) when price is at P2.
d) Calculate the economic profit (or loss) when price is at P3.
e) Below what price will short run economic profits be negative for this firm?
f) How much wheat will be produced in the short run if price is P2?
g) At which price(s) (of choices P1, P2, P3) will firms enter the market?
h) At which price(s) (of choices P1, P2, P3) will firms exit the market?
i) What is the long run equilibrium price in the market for wheat (assuming the industry is perfectly competitive)? What are economic profits at this price?