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    Managerial Economics - Farmer Case Study

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    1. It is estimated that the U.S. has over 2 million farmers that are considered potato producers. In an effort to understand the potato market, data on prices and quantities (in millions) of 50 lb. potato bags were obtained and tabulated. The table across contains the results. P Qd Qs
    6 300 700
    5 400 600
    4 500 500
    3 600 400
    2 700 300

    Two farmers were asked to volunteer information that would help evaluate their operating conditions. They provided the following information:
    Farmer Smith
    Q TC
    0 6500
    1000 9000
    2000 10000
    3000 13000
    4000 17000
    5000 22000
    Farmer Brown
    Q TC
    7000 32400
    8000 34400
    9000 35400
    10000 39400
    11000 49400
    12000 60400

    (i) Determine the market structure of the potato industry.
    (ii) Determine the profit maximizing or loss minimizing quantities and prices for each farmer.
    (iii) Do you think that these farmers will survive or shut down in the short run?
    Show supporting computations and graphs. Farmer Brown's TFC = $2,000.

    2. Complete the table below (showing equations used in calculations of missing values) then answer the questions that follow.
    1 500 300 500 300 - -
    450 900 440 400 140
    3 200 1200 160
    350 200 800 200
    5 300 1500 1150 350

    a. Determine the market structure and explain your reason.
    b. Determine the optimum quantity this firm should produce and sell. Explain why this particular quantity and at what price.
    c. Draw the graph showing the optimum quantity to produce and the price to sell that quantity at.

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    Solution Preview

    See the attachment(s).

    1. i) There are many small sellers, the product is homogeneous, and there is free entry and exit. The industry is therefore perfectly competitive.
    ii) See the attached file "Potato Farms". Each farmer maximizes his profit or minimizes his loss by producing the quantity at which Marginal Revenue (MR) = Marginal Cost (MC). Because this is a perfectly competitive industry, MR = P, ...

    Solution Summary

    This case study for two potato farmers shows how to calculate costs, revenues and profits, and shows how to determine whether the farmers will curvive or shut down in the short run.