Question

In 2006, wheat (a perfectly competitive market) was selling for about 60 cents per pound in the United States. It continued at roughly that level until a sudden drop in demand due to the financial crisis in 2008 brought the price down to 40 cents. In 2010, demand for U.S. wheat rose dramatically due at least in part to growing markets overseas. As a result, price in 2020 has risen to over $1 per pound. If this is a constant-cost industry and was in long run equilibrium in 2006, what price would you expect wheat to move toward in the long run (assume no inflation)?

60 cents per pound

40 cents per pound

something lower than 60 cents per pound but not below 40 cents per pound

something higher than 60 cents per pound

Answer 1

Since the industry is constant cost industry and was in long run equilibrium in 2006, it means that there were no profits at the cost of 60 cents in 2006, because long run equilibrium means no profits. So the cost is 60cents per pound.

As the cost structure is not changing and every industry moves towards teh equilibrium in the long run, where no one makes profit, it means that this industry will move towards 60 cents per pound in the long run.

Hence, option A is correct.

answered by: anonymous