Question

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 byQd = 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

a) long run eqm price = Min AC

So P = 3

Then Qd= 2600,000-200,000*3

= 2000,000

Each Firm produce = 1000

Firms = 2000,000/1000

= 2,000

B) total output in short run = 2000,000

So, 2000,000= 3200,000-200,000P

200,000P = 1200,000

P*= 6

Market price rises to $ 6

Profit of each Firm = (6-3)*1000

= 3000