Question

Intergalactic market for corn is considered perfectly competitive and is currently in equilibrium at a price of $5,000 per ton of corn. Omicron Persei 8 farmers corn at an average total cost given by ATC = Q + 1,500,000/Q and marginal cost given by MC = 2Q, where Q measures tons of corn. In the long run will the intergalactic corn market expand or contract?

A) Expand because there are positive profits, which create incentive for the firms to enter corn production.

B) Contract because there are positive profits, which create incentive for the firms to enter corn production.

C) Expand because there are negative profits, which create incentive for the firms to exit corn production.

D) Contract because there are negative profits, which create incentive for the firms to exit corn production.

Answer 1

Here as firms are earning a positive profit, this will provide an incentive to farmers to enter the market, hence in the long run, the corn market will expand. Hence the answer will be:

A) Expand because there are positive profits, which create incentive for the firms to enter corn production.