Production - Cost and marginal costs
Fangorn Inc., a forestry firm, faces a constant marginal cost for producing firewood of 2 gold coins per cord. As the firms uses very rudimentary equipment, its fixed costs are only 10 gold coins.
a) Draw a picture showing both the marginal cost curve and the total cost curve for Fangorn Inc.
b) What is the shape of the cost curve in this case? Can you conclude something more general about cost curves when marginal costs are constant?
Beaver Forestry Corporation, another forestry firm, produces according to the marginal cost curve (in red) and total cost curve (in green) illustrated below.
c) What are the fixed costs for this firm?
d) If the market price is 2 gold coins/cord, how much will Beaver Forestry Corporation produce?
e) What will be the firm's revenues from this level of production? What will be its total costs? What about profits? (hint : profits are just the difference between revenues and total costs)
f) What will happen if the price of firewood decreases to 1.5 gold coins/cord? What if it falls to 0.75 gold coins/cord?