Case Study #1:
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
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.