Question

Boone's is a firm that produces hay bales. There are many other firms that produce hay bales and all hay bales are identical. Producing hay bales requires workers, and land. a. The market price for hay is $40/bale b. The going wage rate for their workers is $10/hour c. The cost of renting their land is $60/day 1. REQUIRED: Given the above information and the production possibilities below, fill in the following table for one day in the life of Boone's farm (assume they've rented their land for the day). (7 points) Labor Hours Total Product (hay bales) Total Fixed Cost Total Cost Profit Total Variable Cost Total Revenue Marginal Revenue Marginal Cost Marginal Profit (MR-MC) Cable 0 W- 6 18 2. What are the fixed factor of production for Boone's? Explain what happens to the TFC as total product increases. (1 point)

Answer 1

P = $40 =$10/hour r = $60 /day tatour MR it MC TP 0 , nou TFC 0 60 4 60 - 60 4 66 7 60 - 60 18 60 TVC TC 0 60 10 70 20 80 40 100 70 130 110 170 180 240 TR T to 40 -30 80 o 120 20 : 160 30 200 30 240 o 3 40 10 30 40 10 30 40 20 20 40 30 10 Go 400 40 70 30 6 Foco 1 FILLED THE TABLE ; . TFC = fried at $60 per day TVC = Labour hours x wo TC.- TVC 7 TFC TR = TP X Price ($46) n (prefits) = TR - TC MR = TR4 - TRt-1 MC = TCA - TC +-1 Marginal froft e MR-MC

HE ② fixed cost of production for Boone is the cost of renting land which is $60/day It does not mary with the amount of output . » TFC remains the same as suport increases ② factors of production for Boone are land & labour Land is a freed factor while labour is a nareale factor AS Total Product increases, Cas labour hour is also TVC ruses increased ). a

MC - 1 2 3 4 e output MR remains constant as total frisduct increases this is because the fruce is so constant for all units of output. © MC increases as total luoduct increases This is ecause the marginal product is i constant for all units enery additional units and costs are increasing Hence, MC increases anton-

6 Boone should fuoduce hay hale when profits are maximum and any ádaktional unit produced will decrease the profit. Profit are manimesid at $30 when output = 5 5 Hay bale should he produced 6 Prosit of Boone are manimised - when u q=5 q r = 30 (which are max) го шертсо о 4 MK 7 40 / MC = 30 so production show profits will be masinised when HR =MC — (=) MR & MC can be used to make production decisions ,

of MC = 60 - MCYMRA (as HR=40) Hence, Boone should stop production. DO 36 ME=20 - MC CMR Boone should ancrease production till Mc Awхуале» 4 алаlу b MR =чо) - no o entry). 0 In the short run, Boone only has to - make shut down decision as there are many other forms that produce hay bales and are chay hales are identical! This is a perfectly competine market. There is free entry/ enit of forms (no barriers 12 Boone can't increase the price to - $45to increase profit wecause there are many idintidae ferms and they are are Quie takers. They can't determine prices only accept the price au ginen ay market forces of inclusting dimana re supply.

Boone were a m oncholest First Labourers Day (Mauritius) it could set price abone $40 because the demand for monopolistic products are inelastic and Boone will be the single seller . However, it can set up a juice of $1,009 ooo which is a ridiculous price, no one would be willing to luy at at fruce e demand will фу 0 рую." 1 Also, there could le a government intervention at that. 012