Exhibit 13-8

-The GreenAcres mowing company wants to buy the new "Titan3000" lawn mowers.Assume that the lawn mowers are expected to last indefinitely,that operating expenses are negligible,and that the price per acre of mowed lawn is expected to remain constant in the future.The lawn mowing market is perfectly competitive with a market price of $25 per acre.The price of a "Titan300" lawn mower is $5,000.Exhibit 13-8 shows the number of acres that can be mowed with the new lawn mowers.If the interest rate is 25%,the GreenAcres company should buy:

Question

Exhibit 13-8
 
-The GreenAcres mowing company wants to buy the new "Titan3000" lawn mowers.Assume that the lawn mowers are expected to last indefinitely,that operating expenses are negligible,and that the price per acre of mowed lawn is expected to remain constant in the future.The lawn mowing market is perfectly competitive with a market price of $25 per acre.The price of a "Titan300" lawn mower is $5,000.Exhibit 13-8 shows the number of acres that can be mowed with the new lawn mowers.If the interest rate is 25%,the GreenAcres company should buy:

Quizplus · Accepted Answer

To determine the optimal number of lawn mowers to purchase, we need to calculate the marginal revenue product (MRP) and marginal cost (MC) of each additional lawn mower.

The MRP of the first lawn mower is 20 acres at a market price of $25 per acre, which equals $500. The MRP of the second lawn mower is an additional 18 acres, which equals $450. The MRP of each additional lawn mower decreases by 2 acres (i.e. diminishing marginal returns).

The MC of the first lawn mower is $5,000 at a 25% interest rate, which equals $1,250 per year. The MC of the second lawn mower is an additional $1,250 per year, which is equal to the MC of each additional lawn mower (i.e. constant marginal cost).

Since MRP > MC for the first two lawn mowers, it is profitable to purchase them. However, MRP < MC for the third lawn mower (i.e. $400 < $1,250), so it would not be profitable to purchase a third lawn mower. Therefore, the optimal number of lawn mowers to purchase is two.

Exhibit 13-8 -The GreenAcres Mowing Company Wants to Buy the New "Titan3000