II. Mr. I.M Farmer has been producing 500 acres of irrigated cotton in the Texas High Plains. He is very concerned about increasing fuel costs because he uses a lot of fuel to pump irrigation water. He is also concerned because he believes that the price of cotton could drop to 58 cents per pound. He is not sure that he can profitably produce cotton if the price falls to 58 cents or less.

Assume you have been asked to analyze this problem. With the help of an extension agent, you developed the following cost schedule for irrigated cotton at various levels of production. All costs were figured on a per acre basis. Fixed costs are $110 per acre. Total variable costs per acre are listed in the chart below.

Mr. Farmer has asked you to compute the profit maximizing level of production and the amount of profit he can expect at various cotton prices. He particularly wants advice about whether or not he should produce any cotton at all if the price drops to 58 cents per pound. (Assume I. M. Farmer has no alternative to cotton; that is he either produces cotton or nothing.)

1. What is the most profitable cotton yield if the price is 80 cents per pound? What is the profit or loss per acre?

Yield_________________________________

Profit/Loss_________ _______________

2. a) If the price does fall to 58 cents per pound, should Mr. Farmer produce any cotton?

( ) Yes ( ) No

If yes, profit maximizing yield per acre___________________

Profit/loss per acre______ ______

b) How much would Mr. Farmer lose if he did not produce any cotton some year?

Loss per acre_____________________

3. If the expected price is only 40 cents per pound, should Mr. Farmer try to produce anything?

( ) Yes ( ) No

If he does produce, how much? ______ ___________lbs per acre.

What would Profit/Loss be if he produces? __ ________(per acre)

4. What is the lowest price that Mr. Farmer can receive and just cover all his costs? At what yield?

Price_________ _________________

Yield_________ ___________________

Profit/Loss_____ ____________(per acre)

Answer rating: 100% (QA)

1 When p 080 Total product Q Price Revenue R P x Q TC Profit R TC 200 08 160 1758 158 250 08 200 187 ... View the full answer