Question

A Canadian farm family is growing canola, which will be processed into canola oil and shipped to US markets where fast-food restaurants and consumers are using vast quantities of the product. Canadian farmers generally operate in a perfectly competitive market.

a.Explain how a canola farm family perceives the demand curve for their product given their role as price-takers.

b.​​​​​​​Explain why a profit-maximizing farm family would have a supply curve that was identical to the marginal cost curve of the operation.

The explanation must be one paragraph long. The explain must be clear, persistent, and list number for each answer.

Answer 1

Ans a=

• In a perfectly competitive industry individual producers are price takers. The price is established by the intersection of the market supply & market demand curves.

• The demand curve facing an individual producer is different from the market demand curve. The market demand curve is downward sloping, whilst a producer’s demand curve is a horizontal line.
• The producer’s horizontal demand curve denotes a price elasticity of demand which is perfectly elastic.

Ans b=A perfectly competitive producer's supply curve is that part of its MC curve which lies above the minimum of the AVC curve. A perfectly competitive producer maximizes profitability by manufacturing the amount of output which equates price & MC. As such, the producer moves along its positively-sloped MC curve in response to the price changes.