Assume you have a fixed amount of pasture. The table below shows the relationship between the number of cows run on the pasture and the amount of beef produced. Complete the table using the following information: Total fixed costs = $20,000, variable cost of $180 per cow, and a beef price of $90.00 per cwt.
| No. of cows (Head) |
Output (cwt. Of beef) |
Total Variable Cost |
Total Fixed Cost |
Total Cost |
Average Variable Costs |
Average Fixed Costs |
Average Total Cost |
Marginal Cost |
Marginal Revenue |
| 0 |
0 |
|
|
|
xxxx |
xxxx |
xxxx |
xxxx |
xxxx |
| 25 |
104 |
|
|
|
|
|
|
|
|
| 50 |
220 |
|
|
|
|
|
|
|
|
| 75 |
322 |
|
|
|
|
|
|
|
|
| 100 |
413 |
|
|
|
|
|
|
|
|
| 125 |
494 |
|
|
|
|
|
|
|
|
| 150 |
568 |
|
|
|
|
|
|
|
|
| 175 |
629 |
|
|
|
|
|
|
|
|
| 200 |
676 |
|
|
|
|
|
|
|
|
| 225 |
710 |
|
|
|
|
|
|
|
|
| 250 |
730 |
|
|
|
|
|
|
|
|
| 275 |
737 |
|
|
|
|
|
|
|
|
1. Are you in the short run or long run with respect to the pasture?
2. What is the lowest beef price which would make purchasing the pasture and producing beef a breakeven deal? (i.e., the price would have to be higher than this value before you would have a profit.)
a) How many cows would you want at this price?
b) What would your profit or loss be?
3. Assuming a $90.00 beef price as given, would you purchase the pasture to raise beef? WHY?
Probably. This price is higher than the breakeven price so it would be a profitable decision. The decision would depend on what other alternatives I might have for investing the money.
For the remaining questions, assume you already own the pasture.
4. Are you in the short run or long run with respect to the pasture?
5. At the beef price of $90.00 what is the optimum number of cows and what would your profit or loss be at this number and price?
6. If the price of beef was $98.00 what is the optimum number of cows and the profit or loss at that number and price?
7. If the price of beef was $60.00 what is the optimum number of cows and the profit or loss at that number and price?
8. If the price of beef was $45.00 what is the optimum number of cows and the profit or loss at that number and price?
9. At some point the price of beef could be so low that you would be better off with no cows and leaving the pasture idle. This would happen whenever the price of beef was below what value?
10. The price of beef would have to be at least $ _____ to make 225 the optimum number of cows.
11. Assume a beef price of $92.50 and an offer from a neighbor to rent your pasture for $25,000 per year. As a profit maximizer, what should you do? Rent out your pasture or raise beef? Carefully explain your reason(s).