Suppose the market priceof sugar is 22 cents per pound.  If a sugar farmer produces 100,000 pounds of sugar is 30 cents/pound.Is the farmer maximizing profit?  Should the farmer produce more or...

Suppose the market priceof sugar is 22 cents per pound.  If a sugar farmer produces 100,000 pounds of sugar is 30 cents/pound.

Is the farmer maximizing profit?  Should the farmer produce more or less sugar?

Expert Answers
pohnpei397 eNotes educator| Certified Educator

I assume that you are saying that the farmer is producing his sugar and that it is costing him 30 cents per pound to do so.  Is that correct?  Or are you saying that he is charging 30 cents a pound for it?  Either way, he is not maximizing profit and he should produce less sugar.

In a perfectly competitive market (and we usually would say that commodities like sugar are in perfect competition), a producer must produce at the amount where his marginal costs are equal to his marginal revenues.  This is the profit maximizing point.  Here, the costs are 30 cents per pound while the revenue is only 22 cents per pound.  When the MC is greater than MR, the producer must produce less.

dr-anu-singh | Student

No, this farmer is not maximizing profit, since in order to maximize profit farmer must produce at output level where P=MC. In above case P<MC, that is price is 22 cents and marginal cost is 30 cents. the farmer is incurring loss of 30-22 = 8 cents. thus he should reduce the production level and set it at the level where P=MC.