Question

Wheat is produced under perfectly competitive conditions. Individual wheat farmers have U-shaped long-run average cost curves that reach a minimum average cost of $4 per bushel when 2,000 bushels are produced. a) Suppose that the market demand curve for wheat is given by Q = 2,600,000 - 200,000P. In long-run equilibrium, what will be the equilibrium price, quantity, and number of wheat producers? b) Suppose market demand shifts outward to Q = 3,200,000 - 200,000P. If farmers cannot adjust their output in the short run, what will the market price be? What will the profits of the representative firm be? c) Given the new demand curve, find the new long-run equilibrium.

Answer 1

Solution(a) In the long run, price equals minimum average total cost, hence p*= 4. Equat-ing supply and demand,QS=QD= 2,600,000-200,000(4) = 1800,000.Since each farmer produces 2000 bushels, we must have 2000 to give a quantityof 2,000,000 bushels.

(b) Demand increased, but quantity supplied remained at 18 00,000.We haveQS=QD= 18 00,000 = 3,200,000-200,000p. This implies a price of $6per bushel. Profit is given by?=q(p-AC) = 1000(6-4) = 2000.

(c) After the demand shift, long-run price will still equal $3. We haveQs=QD=3,200,000-200,000(4) = 2,400,000 bushels