Reference no: EM13182689
Consider a simplied model of the corn industry. There are two types of corn farm,those with high-quality land, and those with low-quality land. Each type of farm can produce 100 tons per year, but the high-quality land allows the high-quality farms to produce their corn with less fertilizer and fewer workers, so they have lower costs. The cost function for high-quality farms is TC(q) = 250q, while the cost function
for low- quality farms is TC(q) = 350q, where q is measured in tons of corn. We will further assume that there are 15 farms of low-quality and 5 farms of high-quality type and that the industry is large enough to make the market perfectly competitive, so each farm will be a price taker.
A. Compute and graph the marginal and average cost curves for each type of farm.
B. The next step is to gure out the shape of the LR supply curve:
i) How much corn will the industry be willing to supply at a price of $200?
What about at a price of $250? What about $300? $350? $400?
ii) Use your answers to graph the long-run supply curve for the industry, that is, the quantity of output the industry will supply in long-run equilibrium for any given market price.
B. The next step is to gure out the shape of the LR supply curve:
i) How much corn will the industry be willing to supply at a price of $200?
What about at a price of $250? What about $300? $350? $400?
ii) Use your answers to graph the long-run supply curve for the industry, that is, the quantity of output the industry will supply in long-run equilibrium for any given market price.
C. i) Now let's see what happens in equilibrium for dierent levels of demand. Suppose annual demand for corn starts out at Qd=800-2p. What will be the long-run equilibrium price and quantity of corn sold? What will be the prot per ton? Graph this equilibrium on a new graph, and make
it big enough so that you can expand the industry over the course of the problem set.
ii) Suppose demand increases to Qd=1100-2p. What will be the new long-run equilibrium price and quantity? Add this new equilibrium to your graph. What will be the prot per ton for each type of farm?
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