Case Study:
Cost Minimization and Production Decisions for a Corn Farm
Scenario: The Weinandt Family Farm in Wynot, NE raises livestock and grows crops.
Commonly grown crops in Nebraska are corn and soybeans. You are a consultant hired to help a farm similar to the Weinandt Farm make decisions about how much corn to grow this year.
Assignment Details:
Objective:
To use Excel for data analysis and apply economic concepts to make informed production and cost minimization decisions for a corn farm.
Instructions:
1. Market Data Analysis:
- Using the provided market data, create a market supply and demand graph in Excel.
- Determine the market equilibrium price and quantity for corn.
2. Cost and Quantity Estimates:
- Using the provided firm cost and quantity estimates, calculate the following:
- Fixed Costs (FC)
- Variable Costs (VC)
- Average Total Cost (ATC)
- Average Fixed Cost (AFC)
- Average Variable Cost (AVC)
- Marginal Cost (MC)
- Graph ATC, AFC, AVC, and MC in Excel.
3. Cost Minimization Analysis:
- Based on your calculations, identify the range of quantities over which the Average Total Cost (ATC) is minimized.
- Determine the optimal quantity of corn that the farm should aim to produce to minimize costs.
4. Revenue and Profit Analysis:
- Using the optimal quantity identified, estimate the Total Revenue (TR), Total Cost (TC), and Profit/Loss for the farm.
- Calculate these values using the market equilibrium price.
5. Production Decision:
- Based on your analysis, decide whether the farm should grow corn or leave the fields bare.
- Provide a detailed explanation of your decision, supported by your calculations and economic concepts.
6. Market Entry/Exit Analysis:
- Analyze whether farms will enter this market, leave the market, or remain constant based on the profitability and cost structure.
- Explain your reasoning using economic theory related to perfectly competitive markets.
Excel Data and Calculations
Step 1: Market Supply and Demand Graph
- Create a Market Supply and Demand Graph:
- Plot the supply and demand curves using the provided market data.
- Identify the equilibrium point where the supply and demand curves intersect.
Step 2: Firm Cost Calculations
- Calculate Costs:
- Use the provided data to calculate FC, VC, ATC, AFC, AVC, and MC.
- Use Excel formulas to automate these calculations for different levels of output.
Step 3: Cost Minimization
- Graph Costs:
- Create graphs for ATC, AFC, AVC, and MC.
- Identify the range of output where ATC is minimized.
Step 4: Revenue and Profit Calculations
- Estimate Revenue and Costs:
- Calculate TR using the formula: TR = Price * Quantity
- Calculate TC using the formula: TC = FC + VC
- Determine Profit/Loss using the formula: Profit/Loss = TR - TC
Step 5: Production Decision
- Decision Making:
- Analyze your calculations to determine if growing corn is profitable.
- Consider economic principles such as cost structures, market conditions, and profitability.
Step 6: Market Analysis
- Market Dynamics:
- Discuss the potential for new farms to enter the market or existing farms to exit based on profitability.
- Use economic theories related to market entry and exit in perfectly competitive markets.
Submission Requirements:
| QD (millions of bu) |
QS (millions of bu) |
Price/bu |
|
Firm q (thousands of bu) |
TC |
| 0 |
6000 |
10 |
|
0 |
10000 |
| 200 |
5700 |
9.5 |
|
0.5 |
10128 |
| 400 |
5400 |
9 |
|
1 |
10505 |
| 600 |
5100 |
8.5 |
|
1.5 |
11133 |
| 800 |
4800 |
8 |
|
2 |
12010 |
| 1000 |
4500 |
7.5 |
|
2.5 |
13138 |
| 1200 |
4200 |
7 |
|
3 |
14515 |
| 1400 |
3900 |
6.5 |
|
3.5 |
16143 |
| 1600 |
3600 |
6 |
|
4 |
18020 |
| 1800 |
3300 |
5.5 |
|
4.5 |
20148 |
| 2000 |
3000 |
5 |
|
5 |
22525 |
| 2200 |
2700 |
4.5 |
|
5.5 |
25153 |
| 2400 |
2400 |
4 |
|
6 |
28030 |
| 2600 |
2100 |
3.5 |
|
6.5 |
31158 |
| 2800 |
1800 |
3 |
|
7 |
34535 |
| 3000 |
1500 |
2.5 |
|
7.5 |
38163 |
| 3200 |
1200 |
2 |
|
8 |
42040 |
| 3400 |
900 |
1.5 |
|
8.5 |
46168 |
| 3600 |
600 |
1 |
|
9 |
50545 |
| 3800 |
300 |
0.5 |
|
9.5 |
55173 |
| 4000 |
0 |
0 |
|
10 |
60050 |
1. Excel File:
- Submit an Excel file with all your calculations, graphs, and analysis.
- Ensure all formulas and data are correctly inputted and clearly labeled.
2. Written Report:
- Submit a comprehensive report that includes the following sections:
- Introduction: Overview of the scenario and objectives.
- Market Analysis: Supply and demand graph, equilibrium price, and quantity.
- Cost Analysis: Detailed calculations and graphs of ATC, AFC, AVC, and MC.
- Cost Minimization: Identification of the optimal production quantity.
- Revenue and Profit Analysis: Calculations of TR, TC, and Profit/Loss.
- Production Decision: Explanation of whether to grow corn or leave the fields bare.
- Market Analysis: Discussion of market entry/exit dynamics.
- Conclusion: Summary of findings and recommendations.