In Problem 2, Suppose That the Cost Function of the Honey

question 12

Multiple Choice

In Problem 2, suppose that the cost function of the honey farm is C_H(H, A) = - 3A and the cost function of the apple orchard is C_A(H, A) = , where H and A are the number of units of honey and apples produced respectively. The price of honey is $2 and the price of apples is $7 per unit. Let A₁ be the output of apples if the firms operate independently, and let A₂ be the output of apples if the firms are operated by a profit-maximizing single owner.

• A) A₁ = 250 and A₂ = 350.
• B) A₁ = A₂ = 350.
• C) A₁ = 175 and A₂ = 350.
• D) A₁ = 350 and A₂ = 500.
• E) A₁ = 100 and A₂ = 350.

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Definitions:

Variable Costs

Expenses that change in proportion to the level of production or sales activity.

Contribution Margin

The difference between the sales revenue of a product and the variable costs associated with its production and sales.

Unit Contribution Margin

The amount that the sale of one unit contributes towards covering fixed costs, calculated as the sales price per unit minus variable costs per unit.

Net Income

The total profit of a company after all expenses, taxes, and costs have been subtracted from total revenue.