Question

39) The figure below gives the marginal cost and average variable cost curves for 1 rutabega farmer. Given your answers to questions 36-38, draw in the farmer's marginal revenue curve. Revenue and cost (dollars per unit) MC AVC A 50+ ATA 0 10 20 30 40 50 Output (units per day) 40) How much will the farmer produce? 41) What are the farmer's profits? 42) What happens to this market in the long run? Do firms enter or exit?

Answer 1

(36) The market supply function is given as, P = 10 + 3Q To draw a graph, two intercepts (points) are required. P L 0 -3.333 10 0 I Q The demand function is given as, P = 50 - Q To draw a graph, two intercepts (points) are required. P050 Q1500 The graph is as follows: Supply Price Demand 3/3 10 30 40 50 Quantity

(37) Equilibrium is a state of rest. In other words, the point where demand is equal to supply is equilibrium point. Demand = Supply 50-Q = 10 +39 50-10 = 3Q+ 40 = 49 10=9 Thus, the equilibrium market quantity is 10 Substitute this value into either of the two functions. P=50-9 = 50-10 = 40 Thus, the equilibrium market price is $40 per unit. (38) Consumer surplus is the area above the price line and below the demand curve (See graph above). Red colored area is consumer surplus. Consumer surplus in this case is as follows: CS = xbxh = *(50–40)x10 ==x10x10 = 50 Thus, the consumer surplus is $50

(39) The MC and AC curves of a firm in the industry is given. It is given that the market is perfectly competitive, it means the price calculated above is the price for all the firms. In perfect competition, P=AR=MR The graph is as follows: Revenue and cost (dollars per unit) MC AVC 50+ MR + 10 20 30 40 50 Output (units per day) The red colored horizontal line is the MR curve of the farmer. (40) The optimal point of production under perfect competition is where MR=MC Thus, the farmer will produce 40 units per day.

(41) Since, the point of intersection is not clear. Assume that the ATC is $32 per unit at the optimal production point. Following is the way to calculate the profit of the farmer: Profit =(P-ATC) Quantity =($40 – $32) 40 = $8x 40 = $320 Thus, the profit of the farmer is $320 (42) Since the firms are making super-normal profits, new firms enter the industry till the super-normal profit were eliminated. Thus, in the long-run, firms will enter the industry and earns zero-profits.