Econ 1101 Assignment 3

Note 1: Each of the questions (numbered 1, 2, 3 etc.) are to be treated as separate problems (i.e. not necessarily connected to one another). Subparts of each question such as a., b. c., etc , however, do refer to the same question.

Note 2: There should be clear verbal explanations accompanying diagrams and/or numerical calculations (explanations don’t have to be very long but they should make it clear what is being done and the reasoning behind conclusions which are being reached).

Note 3: Numerical values within () are the points for that question or subpart, as the case may be.

  1. (Total 30 points) The table below shows the total variable costs of producing different quantities Q of fertilizer (measured in kilotons where each kiloton is 1000 tons).
    Q     TVC   MC   AVC   AFC   TC   TR   Profit
    0     0 
    10    500 
    20    1500 
    30    6000
    
    1. (15 points) Fill in the blanks in the table assuming that Fixed Cost is$90 and market price at which output can be sold is $200 per kiloton.
    2. (10 points) How many units would be supplied by this firm? Why?
    3. (c) (5 points) How much profit is the firm going to make?
  2. (Total 30 points) The MC curve of an oil refinery is a straight line whose equation is given by the following formula: MC (at a quantity Q) = 100 +0.5Q . The lowest AVC of producing oil is $1.00 (i.e., 100 cents) per litre. Quantity Q is expressed in units of millions of litres, i.e., if Q =1 then it means 1 million litres of oil are being produced. The MC is expressed in cents per litres. In other words, if Q = 1 (million litres) then MC is 100.5 cents per litre, i.e., to produce one more litre of oil will cost us 100.5 extra cents.
    1. (10 points) Draw the MC curve including the intercept term on thevertical axis and indicating the slope. Diagram drawn by hand is ok.
    2. (10 points) What is the supply curve of this refinery in your diagram.
    3. (10 points) If market price of oil is $1.50 per litre how much oil would this refinery want to sell? Explain how you get your answer.

    Explain clearly the reasoning behind your answers below. That is, don’t just cite a rule or formula. If you are citing one you should explain why it is correct.

  3. (20 points) We are told that price of output (measured in Kg) of a fishery is $10, MC at current output is also $10, AVC is $3 and AFC is $2. Is the following reasoning, stated within quotes, correct or incorrect? “This cannot be the profit maximizing level of output because average total cost is only $5 while price is $10, so by increasing output the firm can make extra profit of $5 from an extra unit of output and so the firm should increase its output to get more profit though we cannot say how much more it should increase output since we are not told how AVC changes as output increases”.
  4. (20 points) We are told that farmer Jones used to work as a school teacher very recently for an yearly salary of $70,000 (all teaching related expenses covered by the school) and he can go back to teaching at his old job and salary if he wants to but currently he is engaged full time in operating a soybean farm. His accounts show that he annually spends $100,000 on hired labour, $30,000 on fertilizers, $60,000 on water, electricity and rent on the land all together (he does not own the land). These are the only costs he has to pay for out of pocket. His accounts also show that his annual revenue from sales of soya bean amounts to an annual sum of $250,000. Jones thinks he is doing well and should stick to his farm just because of the profit he is making. Would you agree or disagree? How much profit is he making?