Question

Question 3 20 pts 3) Corn is produced under perfectly competitive conditions. Corn farmers have U-shaped, long-run average cost curves that reach a minimum average cost of $3 per bushel when 1000 bushels are produced. a.(10) If the market demand curve for corn is given byQp = 2,600,000 - 200,000P, in the long-run equilibrium what will be the price of corn, how much total corn will be demanded, and how many corn farms will there be? b.(10) Suppose demand increases to Qd = 3,200,000 – 200,000P and if farmers cannot adjust their output in the short run, what will the market price be with this new demand curve? What will the profits of the typical farm be?

Answer 1

Ans.

a) In long run equilibrium, each firm produced at the minimum point of the average cost and because each firm is the price taker, so, market price must equal minimum of average cost = $3

Thus, Qd = 2600000 - 3*200000 = 2000000 units

As each firm produces 1000 units at this price, the number of firms are = 2000000/1000 = 2000 firms

b) As farmers cannot change their output in short run, so, Qd = 2000000 units. Substituting this in the new demand curve, we get

2000000 = 3200000 - P*200000

=> P = $6

Thus, profits to each firm will be,

Profit = (P - Average cost)*Output = (6-3)*1000 = $3000

Thus, each farm earns a profit of $3000

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