Question

Click on the icon to read the news clip, then use this information to complete the following steps. In the left graph 1 Use the line tool to draw the market demand and supply curves in 2016. Label the curves. 2. The market equilibrium is 5 million gallons and the price is $50 a gallon Use the point tool to draw the market equilibrium and label it In the right graph Price (dollars per gallon) 30 85 Price and cost (dollars per gallon) MC 70- 70 60 60 50 ATC

Answer 1

Supply and demand curve of the farmer has been depicted in figure 1. The equilibrium quantity is 5 million gallons and the equilibrium price is $50 a gallon. This point is where the supply and demand intersect in figure 1.

Price (dollars per galon) 70 supply 30 Demand 10 Quantity milions of gallons per year FIGURE 2

The farmer acts as a price taker and takes the price given by the market. In this case, the marginal revenue curve will be a straight line at price = $ 50. This has been indicated by the red line in figure 2.

At P=MC=$50, the farmer would supply 20 thousand gallons per year. The corresponding average total cost is $40 per gallon. The farmer would earn a profit of $10 per gallon. The profit has been shaded by green in figure 2

Price and cost (dollars per gallon) 80 TO MC 50 50 ATC -MR=P PROFIT 40 30 20- 10- 10 15 20 30 35 Quantity (thousands of golons per yoan FIGURE 2