The marginal cost of producing the first three bushels of corn on Farm 1 is $1.00, $1.25, and $1.33, respectively. For Farm 2, the marginal cost of producing the first three bushels of corn is $0.90, $1.15, and $1.30. Three bushels should be produced if the market price is $1.15 per bushel.

Question

Quizplus · Accepted Answer

To determine whether to produce, farms compare the market price to their marginal cost. If the market price is higher than the marginal cost, it is profitable to produce. In this case, the market price is higher than the marginal cost of all three bushels for Farm 2, so they should produce and sell all three bushels. For Farm 1, the market price is higher than the marginal cost of the first two bushels, but not the third, so they should stop producing after the second bushel. Therefore, the total supply of corn from both farms would be three bushels, and the market price is higher than the marginal cost for all three bushels, indicating that it is profitable for both farms to produce and sell at that price.

The Marginal Cost of Producing the First Three Bushels of Corn