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INTRODUCTION TO AGRICULTURAL ECONOMICS (CAMS 2003)

/in /by

Department of Natural Resource Economics

College of Agricultural and Marine Sciences

Sultan Qaboos University

 

 

INTRODUCTION TO AGRICULTURAL ECONOMICS (CAMS 2003)

 

 

Homework 3: Cost Theory

 

 

Learning Objective: This homework will enable you to understand, Producer Behavior Theory (decision making principles of producers), based on Cost Theory and the derivation of a producer’s supply function.

 

Please contact MS. Amani Al Alawi for clarifications on the homework.

 

  1. The figure given below depicts cost functions of a farm producing onions. Use the information in the figure to answer the following questions.

 

 

 

  • If the price of Onion was 10 OR/Unit, what would be the quantity of onions supplied by the farm?

 

 

  • Estimate the following for the production quantity that would be supplied when the price of Onion is 10 OR/Unit.

 

  • Average Total Cost (ATC)

 

 

  • Average Variable Cost (AVC)

 

 

  • Total Cost (TC)

 

 

  • Total Variable Cost (TVC)

 

 

  • Total Return (TR)

 

 

  • Profit or Loss

 

 

 

 

  • At what price of onion will the farm “close down”?

 

 

 

  • At what output of onion will the farm “close down”?

 

 

 

  • Estimate the following at the “closing down” output of the farm.

 

  • Average Total Cost (ATC)

 

 

  • Average Variable Cost (AVC)

 

 

  • Total Cost (TC)

 

 

  • Total Variable Cost (TVC)

 

 

  • Total Return (TR)

 

 

  • Profit or Loss

 

 

 

  • Define the supply curve of a firm in relation to the cost curves.

 

 

 

 

 

 

 

  1. Consider Total Cost (TC) as composed of Total Fixed Cost (TFC) and Total Variable Cost (TVC) and write formula for the following.

 

  • TC

 

  • TFC

 

  • TVC

 

  • AVC

 

  • AFC

 

  • ATC

 

  • MC

 

  • Use the above formula and fill in the missing cells in the following table 2.2.

 

Table 2.2. Cost data on tomato production using the variable input fertilizer.

 

X Y Price X TFC TVC TC MC ATC AVC AFC
2 40 5 110            
  65         0.4      
  80             0.375  
  90       150        
 
Note: X is quantity of fertilizer (Units)  
  Y is quantity of Tomato (Units)
Price of X is the price of fertilizer (OR/ Unit)

 

 

  • Using the information calculated in table 2.2., estimate the profit (or loss) of production for price of Tomato as 0.40 (OR/Unit) in the Longrun and Shortrun.

 

 
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