Question

Suppose your farm produces grain in a perfectly competitive industry. Currently, you can sell a bushel of grain at $15 per unit. You are producing where marginal revenue equals marginal cost, yielding an output level of 200,000 bushels. At your current level of output, variable costs are $3,340,000 and fixed costs are $150,000. a) What is your current economic profit in the short-run from production? b) Given the correct answer to part a), should you continue producing this output level in the short-run or should you shut down the farm's operations? How could you determine this, even without calculating the two options?

Answer 1

A: Current economic profit = Production* Selling price – Variable costs – Fixedcosts

= 200000*15 -3340000 – 150000

=-490000

Hence there is a loss of $490,000

B: The firm should shut down since it is producing at a level where MC= MR. Beyond this there will be further losses as MC will surpass MR.