5.4. costs, revenues, and profitsquestion 1 price of wheat4$ / bushel price of nitrogen0.1$ / lb...
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5.4. Costs, revenues, and profits
Question 1
Produce wheat?
Nitrogen (lbs / acre)
Wheat yield
(bushels / acre)
Cost of nitrogen application
($ / acre)
Total fixed
costs ($ / acre)
Total variable costs
($ / acre)
Total private
costs ($ / acre)
Revenues
($ / acre)
Private profits ($ /
acre)
NO 0.00 0.00 $ - $ 50.00 $ -
$ 50.00 $ -
$ (50.00)
Yes 0.00 23.00 $ - $ 50.00
$ 60.00
$ 110.00
$ 92.00
$ (18.00)
Yes 10.00 25.00 $ 1.00
$ 50.00
$ 61.00
$ 111.00
$ 100.00
$ (11.00)
Yes 20.00 30.50 $ 2.00
$ 50.00
$ 62.00
$ 112.00
$ 122.00
$ 10.00
Yes 30.00 33.00 $ 3.00
$ 50.00
$ 63.00
$ 113.00
$ 132.00
$ 19.00
Yes 40.00 35.00 $ 4.00
$ 50.00
$ 64.00
$ 114.00
$ 140.00
$ 26.00
Yes 50.00 36.00 $ 5.00
$ 50.00
$ 65.00
$ 115.00
$ 144.00
$ 29.00
Yes 60.00 36.20 $ 6.00
$ 50.00
$ 66.00
$ 116.00
$ 144.80
$ 28.80
Price of wheat 4 $ / bushel
Price of nitrogen 0.1 $ / lb
Fixed costs 50 $ / acre
Other variable costs
60 $ / acre
Review: when maximizing profits we do not always maximize yield / production.
5.4. Costs, revenues, and profits(7) To maximize profits, a farmer does not apply the amount of nitrogen that maximizes yield. Why?a) Because that amount of nitrogen use causes fixed
costs to rise.b) Because if we apply that much nitrogen, the last few
lbs of nitrogen costs more than the additional revenues they provide.
c) Because that much nitrogen would harm the crops and lower yield.
d) Because that would result in so much wheat being produced that the price of wheat would fall.
e) b, d
(8) A farmer who applies however much nitrogen is needed to maximize yield is making the mistake of…a)…not thinking about the impact each lb of nitrogen
has on yield.b)…not thinking about how higher yields reduce
crop prices.c)…not thinking about the cost of nitrogen.d)…spending too little time thinking about how
nitrogen use and fixed costs are correlated.e)a , c
5.4. Costs, revenues, and profits
(8) A farmer should increase the amount of nitrogen she applies per acre of wheat…a)…whenever its marginal product is positive.b)…until the marginal product equals zero.c)…until the marginal product turns negative.d)…until it equals one.e)None of these.
5.4. Costs, revenues, and profits
(9) Like a farmer applying nitrogen, a factory should increase labor hours so long as…a)…the factory is operating in stage 2 of
production.b)…not thinking about how higher yields reduce
crop prices.c)…the marginal product of labor is positive.d)…the value of the additional factory production
is greater than the cost of the extra labor hours.e)a , c
5.4. Costs, revenues, and profits
5.4. Costs, revenues, and profitsProduce wheat?
Nitrogen (lbs / acre)
Wheat yield
(bushels / acre)
Total variable costs
($ / acre)
Average Variable Costs = (Total Variable Costs)/Yield
Units are thus in $ per bushel
NO 0.00 0.00 $ - Yes 0.00 23.00 $ 60.00 $60 / 23 = $2.61 per bushelYes 10.00 25.00 $ 61.00 $2.44Yes 20.00 30.50 $ 62.00 $2.03Yes 30.00 33.00 $ 63.00 $1.91Yes 40.00 35.00 $ 64.00 $1.83Yes 50.00 36.00 $ 65.00 $1.81Yes 60.00 36.20 $ 66.00 $1.82
Price of wheat 4 $ / bushel
Price of nitrogen 0.1 $ / lb
Fixed costs 50 $ / acre
Other variable costs
60 $ / acre
Question 1
Is there some level of nitrogen / yield
where Price > AVC?
Yes! So definitely
produce some wheat.
5.4. Costs, revenues, and profitsProduce wheat?
Nitrogen (lbs / acre)
Wheat yield
(bushels / acre)
Total variable costs
($ / acre)
Average Variable Costs = (Total Variable Costs)/Yield
Units are thus in $ per bushel
NO 0.00 0.00 $ - Yes 0.00 23.00 $ 60.00 $60 / 23 = $2.61 per bushelYes 10.00 25.00 $ 61.00 $2.44Yes 20.00 30.50 $ 62.00 $2.03Yes 30.00 33.00 $ 63.00 $1.91Yes 40.00 35.00 $ 64.00 $1.83Yes 50.00 36.00 $ 65.00 $1.81Yes 60.00 36.20 $ 66.00 $1.82
Question 2
Price of wheat 2.25
$ / bushel
Price of nitrogen 0.1 $ / lb
Fixed costs 50 $ / acre
Other variable costs
60 $ / acre
Is there some level of nitrogen / yield
where Price > AVC?
Yes! So definitely
produce some wheat.
5.4. Costs, revenues, and profitsProduce wheat?
Nitrogen (lbs / acre)
Wheat yield
(bushels / acre)
Total variable costs
($ / acre)
Average Variable Costs = (Total Variable Costs)/Yield
Units are thus in $ per bushel
NO 0.00 0.00 $ - Yes 0.00 23.00 $ 60.00 $60 / 23 = $2.61 per bushelYes 10.00 25.00 $ 61.00 $2.44Yes 20.00 30.50 $ 62.00 $2.03Yes 30.00 33.00 $ 63.00 $1.91Yes 40.00 35.00 $ 64.00 $1.83Yes 50.00 36.00 $ 65.00 $1.81Yes 60.00 36.20 $ 66.00 $1.82
Question 3
Price of wheat 1.75
$ / bushel
Price of nitrogen 0.1 $ / lb
Fixed costs 50 $ / acre
Other variable costs
60 $ / acre
Is there some level of nitrogen / yield
where Price > AVC?
NO! Then produce no
wheat.
5.4. Costs, revenues, and profitsProduce wheat?
Nitrogen (lbs / acre)
Wheat yield
(bushels / acre)
Total variable costs
($ / acre)
Average Variable Costs = (Total Variable Costs)/Yield
Units are thus in $ per bushel
NO 0.00 0.00 $ - Yes 0.00 23.00 $ 60.00 $60 / 23 = $2.61 per bushelYes 10.00 25.00 $ 61.00 $2.44Yes 20.00 30.50 $ 62.00 $2.03Yes 30.00 33.00 $ 63.00 $1.91Yes 40.00 35.00 $ 64.00 $1.83Yes 50.00 36.00 $ 65.00 $1.81Yes 60.00 36.20 $ 66.00 $1.82
Question 4
Price of wheat 4 $ / bushel
Price of nitrogen
0.1 $ / lb
Fixed costs 50,000
$ / acre
Other variable costs
60 $ / acre
Is there some level of nitrogen / yield
where Price > AVC?
Yes! So definitely
produce some wheat.
Observe that when • Price > Average Costs, you are making money• Price > Average Variable Costs, you may or may
not be making money, but it is in your interest to produce something.
5.4. Costs, revenues, and profits
• Your boss laments that after taking out a huge, huge loan to buy broiler houses (for the raising of broilers, chickens raised for meat), her average total costs are very high, equal to $1.00 per lb of live bird. However, broiler prices are only $0.95, so she decides that she should not produce any broilers for the next three months.
• Is anything wrong with this logic?• Yes! Although she will definitely lose money,
she might lose less money if she can produce where his AVC is less than $0.95. That loan is a fixed costs and should not impact her decision to raise broilers in the short-run.
5.4. Costs, revenues, and profits
Profits • = (Price)(Production) – Total Costs
5.4. Costs, revenues, and profits
So long as P > AVC, by
producing something we
can make money to help pay off
fixed costs (FC). Perhaps P is
large enough so that we will also
make money.
5.4. Costs, revenues, and profits
Question 5
Price of wheat 4 $ / bushel
Price of nitrogen
1 $ / lb
Fixed costs 100 $ / acre
Other variable costs
30 $ / acre
Produce wheat?
Nitrogen (lbs / acre)
Wheat yield
(bushels / acre)
Cost of nitrogen
application ($ / acre)
Total fixed costs
($ / acre)
Total variable
costs ($ /
acre)
Total private
costs ($ / acre)
Revenues ($ /
acre)
Private profits ($ / acre)
Average Variable Costs ($
per bushel)
NO 0.00 0.00Yes 0.00 23.00Yes 10.00 25.00Yes 20.00 30.50Yes 30.00 40.00Yes 40.00 45.00Yes 50.00 47.00
Yes 60.00 43.00 $ 60.00
$ 100.00
$ 90.00
$ 190.00
$ 172.00
$ (18.00) $2.09
Try to answer the other columns on your own
5.4. Costs, revenues, and profits
Question 5
Price of wheat 4 $ / bushel
Price of nitrogen
1 $ / lb
Fixed costs 100 $ / acre
Other variable costs
30 $ / acre
Produce wheat?
Nitrogen (lbs / acre)
Wheat yield
(bushels / acre)
Cost of nitrogen
application ($ / acre)
Total fixed costs
($ / acre)
Total variable
costs ($ /
acre)
Total private
costs ($ / acre)
Revenues ($ /
acre)
Private profits ($ / acre)
Average Variable Costs ($
per bushel)
NO 0.00 0.00 $ -
$ 100.00
$ -
$ 100.00
$ -
$ (100.00) --------
Yes 0.00 23.00 $ -
$ 100.00
$ 30.00
$ 130.00
$ 92.00
$ (38.00) $1.30
Yes 10.00 25.00 $ 10.00
$ 100.00
$ 40.00
$ 140.00
$ 100.00
$ (40.00) $1.60
Yes 20.00 30.50 $ 20.00
$ 100.00
$ 50.00
$ 150.00
$ 122.00
$ (28.00) $1.64
Yes 30.00 40.00 $ 30.00
$ 100.00
$ 60.00
$ 160.00
$ 160.00
$ - $1.50
Yes 40.00 45.00 $ 40.00
$ 100.00
$ 70.00
$ 170.00
$ 180.00
$ 10.00 $1.56
Yes 50.00 47.00 $ 50.00
$ 100.00
$ 80.00
$ 180.00
$ 188.00
$ 8.00 $1.70
Yes 60.00 43.00 $ 60.00
$ 100.00
$ 90.00
$ 190.00
$ 172.00
$ (18.00) $2.09
5.b. $(100)5.c. $(38)5.d. 40; 45; $10
How low must the wheat price go until you don’t produce wheat?Answer: $1.5, because that is the minimum AVC.
5.4. Costs, revenues, and profits
Question 6
Price factory receives for its product 1000.00$ / bushelHourly price / wage paid to workers 10.00$ / lbFixed Costs 50000.00$ / acreOther Variable Costs 30000.00$ / acre
Labor Hours Factory production Labor costs Revenues Profits
100 10000 $ 1,000 $ 10,000,000 $ 9,919,000
200 13000 $ 2,000 $ 13,000,000 $ 12,918,000
300 16000 $ 3,000 $ 16,000,000 $ 15,917,000
400 17000 $ 4,000 $ 17,000,000 $ 16,916,000
500 17500 $ 5,000 $ 17,500,000 $ 17,415,000
600 17600 $ 6,000 $ 17,600,000 $ 17,514,000
700 17650 $ 7,000 $ 17,650,000 $ 17,563,000
800 17000 $ 8,000 $ 17,000,000 $ 16,912,000
900 16800 $ 9,000 $ 16,800,000 $ 16,711,000
1000 16500 $ 10,000 $ 16,500,000 $ 16,410,000
Try to answer the other columns on your own