Perfect Competition Wheat is produced under perfectly competitive conditions. In

Question

Perfect Competition

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 $3 per bushel when 1,000 bushels are produced.

a) If the market demand curve for wheat is given by Q=2,600,000 – 200,000P , in long-run equilibrium, what will be the price of wheat, how much total wheat will be demanded, and how many wheat farms will there be?

b)Suppose that demand shifts outward to Q=3,200,000 – 200,000P . If farmers cannot adjust their output in the short-run, what will market price be with this new demand curve? What will the profits of a typical farm be?

c)Given the new demand curve in part (b), what will be the new long-run equilibrium? That is, calculate market price, quantity of wheat produced, and the new equilibrium number of farms in this new situation.

Explanation / Answer

(a) In long run equilibrium, Price = Minimum average cost (AC) = Marginal cost (MC) = $3

Market (total) demand: Q = 2,600,000 - (200,000 x 3) = 2,600,000 - 600,000 = 2,000,000

Number of farms = Q / farm output = 2,000,000 / 1,000 = 2,000

(b) Q = 1,000 x 2,000 = 2,000,000

2,000,000 = 3,200,000 - 200,000P

200,000P = 1,200,000

P = $6

Farm Profit = Farm output x (P - AC) = 1,000 x $(6 - 3) = 1,000 x $3 = $3,000

(c) In new long run equilibrium, Price = Minimum long run AC = $3

Q = 3,200,000 - (200,000 x 3) = 3,200,000 - 600,000 = 2,600,000

New number of farms = 2,600,000 / 1,000 = 2,600

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