Assignment 2 Lasa 1: The Costs Of Production At Joseph Farms

Assignment 2 Lasa 1 The Costs Of Productionjoseph Farms Inc Is A S

Joseph Farms, Inc. is a small firm in the agricultural industry that requires analysis of cost and revenue data to aid in decision-making. The analysis involves completing tables with provided data, calculating key economic metrics, illustrating data with charts, and interpreting market behavior under perfect competition. The central concepts include understanding marginal cost (MC), marginal revenue (MR), profit maximization, and market structure characteristics.

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Joseph Farms, Inc., as a producer in the agricultural sector, operates in a competitive market environment, which is characterized by many buyers and sellers, homogeneous products, and easy entry and exit from the market (Mankiw, 2014). In such a setting, the firm is considered a “price taker,” meaning it cannot influence the market price and must accept the prevailing market price for its product. The data provided indicates that the firm’s product price is set at $165 per unit, aligning with the assumption that in perfect competition, firms face a horizontal demand curve at the market price rather than having pricing power (Pindyck & Rubinfeld, 2018).

To analyze the firm's decision-making, the first step involves completing Table-1 with detailed calculations of fixed costs, variable costs, total costs, and other relevant metrics across different output levels. Assumed fixed costs are $125, and at an output level of 1, the variable costs are $113, with the total costs being $213. These figures help to determine unit costs such as average fixed cost (AFC), average variable cost (AVC), and average total cost (ATC), which are essential in identifying the profit-maximizing output.

The marginal cost (MC) and marginal revenue (MR) play crucial roles in decision-making. The MC represents the cost of producing an additional unit of output, while MR, in perfect competition, equals the market price ($165). The profit-maximizing rule states that a firm should produce at the output level where MC equals MR (Varian, 2014). If MC is less than MR, increasing output adds more revenue than cost, increasing profit. Conversely, if MC exceeds MR, reducing output minimizes losses.

In applying the MC=MR rule to the data, calculations reveal that the firm maximizes profit at the output level where the marginal cost is closest to, but does not exceed, the market price of $165. Based on the data, this is likely at the output level where the marginal cost curve intersects the marginal revenue line at $165.

Next, a chart depicting the data in columns for Marginal Cost and Marginal Revenue is created. This visual representation illustrates the point where MC meets MR, indicating the profit-maximizing quantity. Since total revenue (TR) equals price multiplied by output, and total costs (TC) are derived from summing fixed and variable costs, we can evaluate whether the firm makes an economic profit or incurs a loss. If TR exceeds TC at the profit-maximizing output, the firm earns a positive economic profit. If TR is less than TC, the firm incurs a loss.

Analyzing the data further, the profit or loss per output level is calculated by subtracting total costs from total revenue. These calculations, summarized in Table-2, reveal the exact profitability at each level of output. Typically, in perfect competition, firms tend to produce where economic profit is zero in the long run, corresponding to the break-even point.

The break-even output is identified where total revenue equals total costs. At this point, the firm covers all fixed and variable costs without earning an economic profit or loss. This is crucial for understanding the firm's sustainability in the market (Baumol & Blinder, 2015).

In conclusion, the analysis demonstrates the importance of the MC=MR rule for profit maximization under perfect competition. It underscores that firms are “price takers” due to market characteristics and that production decisions are guided by the intersection of marginal cost and marginal revenue. The data reaffirm that most firms aim to operate at their most efficient output level, ensuring neither economic profits nor losses in the long run, sustaining competitive equilibrium (Stigler, 2017).

References

• Baumol, W. J., & Blinder, A. S. (2015). Economics: Principles and Policy. Cengage Learning.
• Mankiw, N. G. (2014). Principles of Economics (7th ed.). Cengage Learning.
• Pindyck, R. S., & Rubinfeld, D. L. (2018). Microeconomics (9th ed.). Pearson.
• Stigler, G. J. (2017). The theory of economic regulation. Bell Journal of Economics and Management Science, 6(1), 3-21.
• Varian, H. R. (2014). Intermediate Microeconomics: A Modern Approach. W. W. Norton & Company.