The production of agricultural products like wheat is an example of a perfectly
ID: 2494438 • Letter: T
Question
The production of agricultural products like wheat is an example of a perfectly competitive industry Answer each part of this question. The average variable cost per acre planted with wheat was $107 per acre Assuming a yield of 50 bushels per acre, calculate the average variable cost per bushel of wheat The average price of wheat received by a farmer in 2014 was $2.65 per bushel Ho you think the average farm would have exited the industry In the short run? Explain With a yield of 50 bushels of wheat per acre, the average total cost per farm was $3.80 per bushel The harvested acreage for wheat In the United Mates fell from 418, 000 acres in 2014 to 274,000 in 2015. Using the Information on prices arid costs here and in parts a and b explain why this might have happened Using the above information, do you think the prices of wheat were higher or lower prior to 2014? Why?Explanation / Answer
A. Average variable cost per bushel of wheat will be = 107/50 = 2.14
B. At P = 2.65 per bushel, the price is above the average variable costs of $2.14. This means that firm is able to cover its variable cost. Firm will not exit in the short run.
C. The average farm would have exited the industry in the long run because the price it received per bushel was less than the average total cost of production. The farm was incurring an economic loss by operating. So a decline in the harvested acreage of wheat should have been expected after 2014.
D. Because unprofitable farms were operating in 1998, when prices were $2.65 per bushel, we would expect that prior to 2014, prices were higher—assuming that production costs were approximately the same. So prior to 2014, farms were at least breaking even. Indeed, the average price of wheat was $4.25 per bushel in 2014 and $3.85 per bushel in 2015.
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