Theory question 102
Theory of Costs and RevenueThe table below represents the cost function of a poultry farm. The price of a crate of eggs is $21. Use the information contained in the table to answer the questions that follow.
Quantity of eggs (in crates) | Total Cost (in $)
0 | 50
1 | 55
2 | 62
3 | 75
4 | 96
5 | 125
6 | 162
7 | 203
8 | 248
(a) What is the fixed cost of the farm?
(b) (i) Calculate the marginal cost at each level of output. (ii) What is the profit maximizing output of the farm?
(c) Draw the demand curve for the farm.
Show the model answer
(a) Fixed cost = total cost at zero output = $50.
(b)(i) MC = TCn − TCn−1: 1 → 5; 2 → 7; 3 → 13; 4 → 21; 5 → 29; 6 → 37; 7 → 41; 8 → 45
(ii) Profit is maximised where MC = MR = price = $21: output = 4 crates.
(c) The farm is a price taker: its demand (AR = MR) curve is a horizontal straight line at $21 for all quantities, i.e. perfectly elastic; label axes (price, quantity).
Fixed cost is the cost when nothing is produced; at a given market price, MR = price.