Question

The dairy industry in New Zealand uses a co-operative structure in which individual dairy farmers deliver its milk to a centralized firm who processes milk and exports it. What are the inputs required to be a dairy farmer? What are the inputs required to be a milk producer? [2 marks] 2. Assuming this co-operative structure minimizes the cost of milk production, what does this imply about the fixed and variable costs of raising cattle and the fixed and variable costs of processing milk? Draw a graph showing Marginal Cost, Average Total Cost, Average Fixed Costs, and Average Variable Costs of dairy farmers and milk processors. [2 marks] 3. Based on the technology being used, discuss whether there are barriers to entry at the individual farm level. Discuss whether there are barriers to entry at the processing level. How many firms do we predict to exist in each of these layers of milk production in New Zealand? [1 marks] 4. Fonterra takes milk from individual farmers and pools it together. This suggests that milk is considered a homogeneous good. How does this influence the level of market power that firms have in the industry? [1 marks] 5. Based on the industry, how easy would it be for new firms to enter into the market? How fast would we expect quantities to adjust if prices go up? How fast would we expect quantities to fall as prices go down? [1 marks]

Answer 1