1. 5.4. Costs, revenues, and profitsQuestion 1 Price of wheat4$ / bushel Price of nitrogen0.1$ / lb Fixed costs50$ / acre Other variable costs60$ / acre Review: when maximizing profits we do not always maximize yield / production.

2. 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

3. (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 5.4. Costs, revenues, and profits

4. (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. 5.4. Costs, revenues, and profits

5. (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 profits

6. Price of wheat4$ / bushel Price of nitrogen0.1$ / lb Fixed costs50$ / acre Other variable costs60$ / acre Question 1 Is there some level of nitrogen / yield where Price > AVC? Is there some level of nitrogen / yield where Price > AVC? Yes! So definitely produce some wheat.

7. 5.4. Costs, revenues, and profitsQuestion 2 Price of wheat2.25$ / bushel Price of nitrogen0.1$ / lb Fixed costs50$ / acre Other variable costs60$ / acre Is there some level of nitrogen / yield where Price > AVC? Is there some level of nitrogen / yield where Price > AVC? Yes! So definitely produce some wheat.

8. 5.4. Costs, revenues, and profitsQuestion 3 Price of wheat1.75$ / bushel Price of nitrogen0.1$ / lb Fixed costs50$ / acre Other variable costs60$ / acre Is there some level of nitrogen / yield where Price > AVC? Is there some level of nitrogen / yield where Price > AVC? NO! Then produce no wheat.

9. 5.4. Costs, revenues, and profitsQuestion 4 Price of wheat4$ / bushel Price of nitrogen0.1$ / lb Fixed costs50,000$ / acre Other variable costs60$ / acre Is there some level of nitrogen / yield where Price > AVC? Is there some level of nitrogen / yield where Price > AVC? Yes! So definitely produce some wheat.

10. 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. 5.4. Costs, revenues, and profits

11. 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. 5.4. Costs, revenues, and profits

12. 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.

13. 5.4. Costs, revenues, and profitsQuestion 5 Price of wheat4$ / bushel Price of nitrogen1$ / lb Fixed costs100$ / acre Other variable costs30$ / acre Try to answer the other columns on your own

14. 5.4. Costs, revenues, and profitsQuestion 5 Price of wheat4$ / bushel Price of nitrogen1$ / lb Fixed costs100$ / acre Other variable costs30$ / acre 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.

15. 5.4. Costs, revenues, and profitsQuestion 6 Try to answer the other columns on your own