Question

There are generally two ways for the farm family in Question #2 to maximize profitability in their operation, either by operating at the point at which marginal revenue equals marginal costs, or alternatively, operating by maximizing the difference between Total Revenue and Total Costs.

A Canadian farm family is growing canola, which will be processed into canola oil and shipped to US markets where fast-food restaurants and consumers are using vast quantities of the product. Canadian farmers generally operate in a perfectly competitive market.

A. Explain the practical deficiencies for this farm family in using the “marginal revenue equals marginal cost approach” to maximize profitability.

B. Given the fact that the farm family produces a commodity and they are price-takers in a perfectly competitive environment, what might be the best strategy for success (i.e. maximizing profitability) in attempting to deal with these commodity prices over which they have no control?

C. How would economies of scale and/or scope affect the farm family’s ability to be profitable in such a competitive market? Would it play a role at all? Explain.

Answer 1

The difficulty is that production takes in bulk and so is consumption of inputs. Family can't vary one are two units of farm. Some factors of production are also indivisible. Further it is quite cost consuming and time consuming. Because of these reasons it is difficult to use

2 The best strategy is to produce more. Differentiation in any manner is ruled out

3 family will reduce costs and try to become profitable. But so will other farmers who in perfect competition use similar inputs and produce similar products. Once again price will fall to marginal cost. But total revenue and total profits in short run will be larger