Question

3. One wheat farm has very rich soil that requires little irigation or care, while a neighboring wheat farm has very poor soil that requires constant intervention to pro- duce wheat. Suppose that each farm is producing the profit-maximizing level of out- put. For which farm (if either) will the marginal cost of producing another bushel of wheat be higher? (Hint: Under what type of market structure is wheat sold?)

Answer 1

Wheat is sold in perfectly competitive market. Each farmer is price taker and produces such that Marginal Cost is equal to market price.

In the case of a farm that has very rich soil will require lower cost in irrigation or care. On the other hand other farm which has poor soil quality will require higher cost in irrigation or care. Marginal productivity is expected to be lower in case of farm which has poor soil.

We can say that marginal cost for additional unit of bushel production of wheat should be higher in case of farm with poor soil as compared to the farm with good soil.

Farm with poor soil will select lower quantity to produce for profit maximization.