Question

2) The table below represents the costs for an individual corn farmer. Use the information to answer the following questions. Fixed Quantity cost Marginal Variable Cost Total Cost Cost Cost 100 200 300 400 500 600 700 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $100 $175 $225 $300 $400 $600 $900 $1,100 $1,175 $1,225 $1,300 $1,400 $1,600 $1,900 Average Average Total Variable Cost $11 $1.00 $5.88 $0.88 $4.08 $0.75 $3.25 $0.75 $2.80 $0.80 $2.67 $1.00 $2.71 $1.29 $1.00 $0.75 $0.50 $0.75 $1.00 $2.00 $3.00 a. Suppose the market price is $2.20 per bushel of corn. Will the farmer continue producing in the short run? Why or why not? Explain briefly. b. At the market price of $2.20, what quantity will the farmer choose to sell? What will the profit of the farmer be? c. If this situation continues in the long run, do you expect farmers to enter or exit this market. How will this affect the profits of the average farmer?

Answer 1

a) When P = 2.20

The farmer will keep producing in the short run because the price is above its minimum AVC.The farmer will produce as it is able to recover its variable cost which only matters in the short run.

b) Setting P=MC for profit maximization, the farmer will produce Q=600 units

profits = TR-TC = (2.20*600) - 1600 = 1320-1600= -280(loss)

c) If this continues in the long run, farmers will exit the market as they are not able to recover their total cost.

In the long run, as firms exit, the supply decreases which will increase the price until it is equal to the minimum ATC at which point the farmers will have no incentive to leave the market as they will break even so profits, in the long run, = zero.