Question

You are the owner of a farm. Your farm's main production is Milk. There are many farms like you in Canada.

1 What is the competition type in your industry? Why?

2 How do you decide about the price? Graph and Explain.

3 Show on a graph and explain how the profit maximization point is decided?

4 If the government limits the maximum price of milk in the market, how would this price ceiling affect the economy? Graph and Explanation.

Answer 1

1. As there are many other farms which produce same product milk, so this is called Perfect Competition. There are large number of sellers selling a homogenous product Milk.

2. The price is determined by the industry and each firm in the industry is a price - taker. A firm does not have power to influence the industry price due to existence of large number of sellers and consumers. The price is determined by the intersection of demand and supply as shown in the graph below:

OP is the price prevailing in the market of milk.

3. Profit maximization point in the long run is determined where the AR = MR=P = AC= MC

MC cuts AC curve at its minimum point.. OQ and OP are the profit maximizing level of output and price. Q is also known as minimum efficient scale.

Mc 2. AC D = AR=MR

4.

Price ceiling makes the market of milk inefficient. It reduces the price of milk and creates excess demand or shortage of milk as seen in the diagram below (Difference between Q3 and Q2). Also, it imposes a social cost on society known as Deadweight Loss (DWL), shown by the shaded triangle.

* DWL - - - Price Ceiling O2 a, 03 Q3 Shortage