Profit-Maximizing Question (Check My Work)?

Question

You are an economic consultant for Farmer Perk, who produces raw cotton. One day he gives you the following cost data. The market price for a pound of cotton is $7. Use the table to answer the following questions.

Here's the table: http://i38.tinypic.com/21j9dw5.jpg

#1 - What is Farmer Perk's profit-maximizing level of output?

How many (?) pounds of cotton per day?

My Answer: 4 pounds per day

#2 - What is Farmer Perk's total revenue at the current market price when he maximizes his profits?

My Answer: $28

#3 - At the current market price, Farmer Perk will:

A. Produce in the short run and produce in the long run.

B. Shut down in the short run and produce in the long run.

C. Shut down in the short run and exit in the long run.

D. Produce in the short run and exit in the long run.

My Answer: A - market price is sufficient

Answer 1

You are correct until #3.

The cost curve is going up at a rate of that can not be substained in the long run.

He has to find the varibles at which the price meet equalibrium and start to go down as he increases production.

because there is no such place in the cost curve, he will never survive in the long run, therefore the correct answer would be "D"

Answer 2

#1 is correct at 4 lbs  since mc=mr rule applies.

#2 is correct at $28 since price of $7 times quantity of 4 is total revenues of $28

#3 is incorrect, if producing 4 units then total cost will be fixed of $12 plus variable of $20 for a total cost of $32.  If only getting revenues of $28, then in the short run there is a loss of $4 .  This will lead to answer D.  Produce in the short run to cover the fixed costs and chew into the variable, but not sustain this in the long run since consistent loss will result in exit from the industry.