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Assignment Activity unit 5 - Cost and Production Analysis A Case Study of GreenHarvest Farms'

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220 views

Assignment Activity unit 5 - Cost and Production Analysis A Case Study of GreenHarvest Farms'

Uploaded by

Rami H. Al shaddadi
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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University of the people

BUS 1103 - Microeconomics

Dr. Mitra Farkhani

October 11, 2024


Cost and Production Analysis: A Case Study of GreenHarvest Farms'

Introduction:

GreenHarvest Farms, a leading organic produce producer, faces increasing market

demand. To meet this demand, the company is considering expansion strategies. This analysis

will examine the firm's current production, cost, revenue, and productivity to inform future

decisions.

I. Defining concepts of Production, Cost, Revenue, and Productivity

Production: refers to the output level of GreenHarvest Farms, the amount of organic fruits and

vegetables produced (measured in tons). It directly impacts revenue and cost structures as higher

production typically leads to higher costs but also the potential for increased revenue.

Cost: refers to the expenses the company incurs during production. In the short run, these

include both fixed costs (such as equipment) and variable costs (such as labor and materials).

Costs are categorized into Total Cost (TC), Average Cost (AC), and Marginal Cost (MC).

Revenue: is the income generated from selling organic produce. The Total Revenue (TR) is

found by multiplying the quantity produced by the price per ton. Average Revenue (AR) and

Marginal Revenue (MR) measure the revenue per unit and the additional revenue from selling

one more unit, respectively.

Productivity: Relates to how efficiently GreenHarvest uses its inputs (labor, land, etc.) to

produce output. Higher productivity can lower costs, improve profitability, and impact the firm’s

competitive advantage.
II. Short-run analysis:

Using the provided data, we can calculate the following:

 Average Cost (AC) = Total Cost (TC) / Quantity (Q)

 Marginal Cost (MC) = Change in Total Cost / Change in Quantity

 Average Revenue (AR) = Total Revenue (TR) / Quantity (Q)

 Marginal Revenue (MR) = Change in Total Revenue / Change in Quantity

 Profit or Loss = Total Revenue (TR) - Total Cost (TC)

Calculation of Key Metrics

Quantity (Q) Price (P) TC TR AC MC AR MR Profit


100 $200 $30,000 $20,000 $300 - $200 - -$10,000
200 $180 $55,000 $36,000 $275 $250 $180 -$20 -$19,000
300 $160 $80,000 $48,000 $266.67 $250 $160 -$20 -$32,000
400 $140 $110,000 $56,000 $275 $300 $140 -$20 -$54,000
500 $120 $140,000 $60,000 $280 $300 $120 -$20 -$80,000

Analysis:

 AC: Initially decreases, indicating economies of scale. However, it starts to increase,

suggesting diseconomies of scale.

 MC: Generally increases, reflecting the law of diminishing marginal returns.

 AR: Decreases as price falls to meet market demand.

 MR: Decreases at a faster rate than AR, indicating a downward-sloping demand curve.
 Profit: Decreases at each production level, suggesting the firm is operating at a loss.

III. Economies or Diseconomies of Scale:

Look at how the Average Cost (AC) changes as production increases. If AC decreases as

output increases, GreenHarvest Farms experiences economies of scale, meaning larger

production reduces per-unit costs. Conversely, if AC increases with output, it indicates

diseconomies of scale, where the firm becomes less efficient as it grows.

IV. Recommendations for Short-Run Profitability

Given the negative profit margins at all production levels, GreenHarvest should decrease

production in the short run. This could involve reducing output, adjusting pricing strategies, or

seeking ways to reduce costs.


References:

Mankiw, N. G. (2020). Principles of Economics (8th ed.).

Shapiro, D., MacDonald, D., Greenlaw, S. A., Dodge, E., Gamez, C., Jauregui, Andres.,

Keenan, D., Moledina, A., Richardson, C., & Sonenshine, R. (2023). Principles of

microeconomics (3rd ed.). OpenStax. Licensed under CC 2.0.

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