The following questions are based off this article: https://www.washingtonpost.c
ID: 1130328 • Letter: T
Question
The following questions are based off this article: https://www.washingtonpost.com/news/food/wp/2017/05/02/avocado-prices-are-at-a-record-high-just-in-time-for-cinco-de-mayo/?utm_term=.9587e0415ec0
1. The article explains that "Avocados are “alternate-bearing crops, with large harvests one year and smaller ones the next.” Assume a farm had a small crop this year and expects a big crop next year. Think about the farm's cost curves. If you get more avocados per tree next year, what is the impact on your: (Briefly define each term and explain the impact)
a) fixed costs and variable costs
b) marginal costs
Explanation / Answer
In production total cost represents the cost of the input used plus the overhead cost of production. The total cost of production is thus given as TC=FC+VC. Here, FC is the fixed cost of production, VC is the variable cost of production and TC is the total cost of production.
Fixed cost is the cost of fixed input of production. The fixed inputs are dose that does not changes in the short run, such as land, capital etc. The fixed cost also does not depend on the level of input. The producers have to incur these costs even if the total production and sales is zero. Variable cost is the cost that varies with the level of output produced. It is the cost of inputs that vary in the short run, such as labor cost.
In this case if the firm increases its input such as labor to work in the firm in case of hire crop the variable cost of the firm will rise. As the firm now has large quantity of output the avarage costs (both fixed and variable per unit cost) will fall next year.
b)
Marginal cost is the cost of one incremental unit of production. That is if we increase production by one unit, the additional cost the firm incurs is the marginal cost. The marginal cost depends on the variable cost. As and if variable cost rises, the marginal cost will also increase and vice varsa.
As input prices remains unchanged incremental cost of large numbers of avocados will be smaller than before due to large production.
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