Choosing output quantity under perfect competition (Context Rich Problem)
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Initial Publication Date: March 29, 2012
Summary
Students are presented with price, average cost and marginal cost information to determine whether a perfectly competitive firm - in this case, a farm selling vegetable shares - should increase, decrease or keep constant its production level.
CollapseLearning Goals
This problem asks students to identify relevant information and recognize and apply the P=MC rule in a perfect competition setting.
Context for Use
This problem is appropriate for a Principles of Microeconomics course. It can be used as a quick in-class activity (approximately 5-10 minutes) or assigned as part of a problem set.
Description and Teaching Materials
Your farm sells vegetables through a Community Supported Agriculture program, in which families purchase an annual share of vegetables for a price of $500. There are many farms in your area offering a similar program and you all charge the same price. At this price, you sell 100 vegetable subscriptions per year. Although you don't have complete knowledge of all your costs, you do know that your lowest possible average total cost per vegetable subscription is $450 and that your average total cost this year was $475. You estimate the marginal cost of selling an additional subscription to be $490. Remembering lessons learned in Economics courses, you sketch your production decision this year and come to a conclusion about future production. What did you decide? Are you going to increase, decrease, or keep constant the number of vegetable subscriptions you offer in this market?
Output decision for a CSA farm (Microsoft Word 2007 (.docx) 13kB Mar14 12)
Teaching Notes and Tips
Students may choose to calculate profit for this firm (because quantity, price and average total cost are available) but they should recognize the most relevant information is the P and MC comparison.
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Assessment
This problem emphasizes the P=MC decision rule for perfect competition; successful completion of the problem should prompt students to look for situations where P and MC diverge in other contexts. The purpose of the assessment will determine whether or not you need a grading rubric.