A sheep farmer tells you that he is thinking of quitting farming due to the recent drop in the price of lamb. "I am just making a loss by continuing operations", he laments. After looking at his production and cost data, you find that the price of lamb is indeed below average variable cost. What advice would you give him. Show your analysis in terms of a graph.

You are in the business of growing red capsicums (q). The market price for q is $10.00 per kg. The market for red capsicums is perfectly competitive. The marginal cost, average total cost , and average variable cost for growing red capsicums is given as follows:

MC = 2q + 2

ATC = q + (100/q) + 2

AVC = q + 2


1.What is the marginal revenue from a kg. of red capsicums?

2.What is the average revenue from a kg. of red capsicums?

3.What is the fixed cost for red capsicums?

4.How many kgs. of red capsicums will be produced to maximize profits?

5.What is the profit maximizing level of profits?

6.If the price of a kg. of red capsicums increases to $20.00, what quantity of red capsicums will be supplied?


In a competitive market in long-run equilibrium, the market supply and demand are:


P = 30 + 0.50Q


P = 100 - 1.5Q

where P is dollars per unit and Q is rate of production and sales in hundreds of units per day. A typical firm in this market has a marginal cost of production expressed as:

MC = 3.0 + 15q.

1.Determine the market equilibrium rate of sales (Q) and price (P). (Hint: Equilibrium occurs when Supply = Demand).

2.Determine the rate of sales (q) by the typical firm. (Hint: This is the amount of q where MR = MC).

3.Determine the producer surplus of the typical firm. (Hint: The area of a triangle (A) is A = 1/2 bh, where b = base of triangle, and h = height of triangle).


Suppose that the income for an apple producer in Nelson is dependant on the weather. Historical data from the meteorological services suggests that the rainfall patterns can be categorised as highly productive (HP) with a probability of 0.2, moderately productive (MP) with a probability of 0.6, and non-productive (NP) with a probability of 0.2. Orchard revenue for the average apple farmer in Nelson under the various weather conditions is listed in the table below:

Growing conditions Probability Income

Highly Productive 0.2 $500,000

Moderately Productive 0.6 $300,000

Non-productive 0.2 -$200,000




1.Calculate the expected orchard revenue for the average Nelson apple grower.

2.Calculate the variance in orchard revenue for the average Nelson apple grower.

3.Why do farmers not always choose to pursue the strategy with the greatest expected

income? Please support your answer with a diagram, which illustrates the concept of risk


4.Suggest strategies that a farmer might use to deal with risk and uncertainty.