3. There are generally two ways for the farm family in Question #2 to maximize p

Question

3. There are generally two ways for the farm family in Question #2 to maximize profitability in their operation, either by operating at the point at which marginal revenue equals marginal costs, or alternatively, operating by maximizing the difference between Total Revenue and Total Costs. a. Explain the practical deficiencies for this farm family in using the “marginal revenue equals marginal cost approach” to maximize profitability. b. Given the fact that the farm family produces a commodity and they are price-takers in a perfectly competitive environment, what might be the best strategy for success (i.e. maximizing profitability) in attempting to deal with these commodity prices over which they have no control? c. How would economies of scale and/or scope affect the farm family’s ability to be profitable in such a competitive market? Would it play a role at all? Explain.

Explanation / Answer

1) profit=TR-TC

In order to maximise some function we always differentiate and put it equal to zero amd second double differentiation should be negative

Thus dprofit/dQ=dTr/dQ-dTC/dQ=MR-MC=0 thus MC=MR and

Second condition is slope of MC>slope of MR

B)P=MC is the profit maximising strategy because P=MR in perfctly competitive market

C)economies of scale represent that AC decreases as Q iincreases. Amd AC decreases when MC is less than AC. Thus economies of scale makes a producer tk be in more profit AC decreases as quantity increases

Related Questions

Navigate

• Browse (All)
• Browse 3
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.