5.4. Costs, revenues, and profitsQuestion 1 Price of wheat4$ / bushel Price of nitrogen0.1$ / lb Fixed costs50$ / acre Other variable costs60$ / acre Review:

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


(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.


(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 profitsProduce wheat?


Wheat yield

(bushels / acre)


($ / 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





60 $ / acre

Question 1

Is there some level of nitrogen / yield

where Price > AVC?

Yes! So definitely

produce some wheat.



Wheat yield

(bushels / acre)


($ / acre)




Question 2

Price of wheat 2.25

$ / bushel




60 $ / acre


where Price > AVC?

Yes! So definitely

produce some wheat.



Wheat yield

(bushels / acre)


($ / acre)




Question 3

Price of wheat 1.75

$ / bushel




60 $ / acre


where Price > AVC?

NO! Then produce no

wheat.



Wheat yield

(bushels / acre)


($ / acre)




Question 4


Price of nitrogen

0.1 $ / lb

Fixed costs 50,000

$ / acre


60 $ / acre


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.


• 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.


Profits • = (Price)(Production) – Total Costs


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.


Question 5


Price of nitrogen

1 $ / lb



30 $ / acre

Produce wheat?


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


Question 5


Price of nitrogen

1 $ / lb



30 $ / acre

Produce wheat?


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.


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

Documents

5.4. Costs, revenues, and profitsQuestion 1 Price of wheat4$ / bushel Price of nitrogen0.1$ / lb Fixed costs50$ / acre Other variable costs60$ / acre Review: