 |  Principles of Microeconomics, 1st Canadian Edition Robert H. Frank,
Cornell University
Ben S. Bernanke,
Princeton University
Lars Osberg,
Dalhousie University
Melvin Cross,
Dalhousie University
Brian MacLean,
Laurentian University
Thinking like an Economist
Graphing ExercisesExtending the Text Example 1.4 looks at the concept of marginal cost and marginal benefit by asking how many kilograms of compost Heather should use on her tomato patch to generate the highest possible amount of profit. How can we transform the example, which is presented in table form, into a graphical form that will allow us to quickly determine the answer to Heather's question? |
| | 1. | The graph pop-up shows how tomato production changes as the amount of compost applied changes and provides information on the price of compost and tomatoes. Note that the price and production data are somewhat different than those presented in Example 1.4. The table also shows the marginal benefit and marginal cost as one more kilogram of compost is added to tomato production. In addition, the marginal benefit and cost information is presented graphically (click on Plot MB to trace out the marginal benefit curve). Use the graph to determine how much compost Heather should use on her tomatoes, based on the information presented. Explain how you arrived at your answer.
See our suggested answer. |
| | 2. | Verify that your answer to the question above is correct. That is, show that the highest level of profits occurs at the quantity of compost you selected. To do this, on a piece of paper copy the first two columns of the graph pop-up (the compost and tomato production information) and for each quantity of compost added, determine the total cost of the compost used, the total revenue generated from the resulting tomato production, and the amount of profit (total revenue - total cost). Which level of compost use leads to the highest profit? How is this analysis using total costs and total revenue related to your analysis using marginal costs and marginal benefits?
See our suggested answer. |
| On Your Own: What Happens To Heather's Decision When Prices Change? The example above makes a number of assumptions. For example, the cost of the compost, the price of tomatoes, and the overall relationship between the amount of compost and the resulting tomato production is assumed to be unchanging. What happens to Heather's decision about how much compost to use when these factors change? Our graphical analysis of marginal costs and marginal benefits can help provide the answer. |
| | 3. | How much compost will Heather add to her tomato garden if the price of compost falls to $.75 per kilogram (keeping the price of tomatoes at $.20 per kilogram)? To begin, change the compost price in the graph pop-up and notice how the table and graph changes. Click on the Plot MB button to trace out the MB curve again. Then determine the amount of compost Heather will use if her goal is to make as much money as possible. Compare this amount to your original answer. Did it increase or decrease? Why?
See our suggested answer. |
| | 4. | How much compost will Heather add to her tomato garden if instead the price of tomatoes rises to $.40 per kilogram, while the price of compost remains at its original level of $1.40 per kilogram? To begin, click the Reset button to reset the original values in the graph pop-up. Next, change the price of tomatoes in the table to $.40 and notice how the table values and graph change. Click on the Plot MB button to trace out the new MB curve. Then determine the amount of compost Heather will use if her goal is to make as much money as possible. Compare this amount to your original answer. Did it increase or decrease? Why?
See our suggested answer. |
| Question to Think About... What if Heather takes a gardening class that teaches her better tomato growing techniques (weeding, watering, pruning tips, for example) that lead to a dramatic increase in tomato production? For example, what if Heather can now produce 100% more tomatoes for any given level of compost use? How will this affect how much compost Heather uses, if her goal is to make as much money as possible?
To begin, click the Reset button to reset the original values in the graph pop-up. Next, slide the productivity index to 100%. See how the values in the table change. Also, click the Plot MB button to trace out a new MB curve. |
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2003 McGraw-Hill Higher Education