Question

The owner of a wheat farm sells her produce in a perfectly competitive market. Her annual wheat turnover amounts to 800 bushels, generating a total revenue of $4,800. However, harvesting the 801st bushel of wheat increases her total cost of farming from $4,800 to $4,806.

This implies that the wheat producer's:

a) average fixed cost will rise if she harvests the 801st bushel of wheat.
b) revenue will fall by $8 if she harvests the 801st bushel of wheat.
c) marginal revenue will equal marginal cost for the 801st bushel of wheat.
d) profit will fall by $10 if she harvests the 801st bushel of wheat.

Answer 1

Option C. Marginal revenue will equal marginal cost for the 801st bushel of wheat.

Step-by-step explanation:

The reason is that the average revenue of the firm is $6 ($4,800/800) which means the average marginal revenue is $6 and what we must consider now is the cost at 800 bushels and 801 bushel.

Case 1. So the increase in the average cost for 800 bushels is $4,800 which means unit marginal cost per bushel is $6 ($4800/800).

Case 2. For 801 bushel, the total cost increases to $4806 which is $6 marginal cost per unit increase.

Hence, the marginal revenue becomes equal to marginal cost at this point.

So the option C is correct.