Producers of a product (limequats, an exotic fruit) sold in a competitive market
ID: 1111676 • Letter: P
Question
Producers of a product (limequats, an exotic fruit) sold in a competitive market use one
variable factor (seeds), also sold in a competitive market. Each fruit grower faces this
production function:
L of seeds/annum Q of limequats/annum
0 0
2 20
4 38
6 54
8 68
10 80
12 90
14 98
16 104
18 108
20 110
We observe that the fruit sells for
$7 each
2. a. If seeds are sold for $20 each, how many seeds would you advise each farmer
to buy?
b. What would your advice be if seed prices rose to $40?
3 a. Now assume a second variable factor (land) is involved. Analyze the theoretical
effect of a rise in land prices on the demand for seeds if land and seed are
substitutes.
b. Analyze the effect of a rise in land prices on the D for seeds if land & seed are
complements.
c. What else might make the demand for seeds shift, besides the prices of other
factors?
Explanation / Answer
2 a) for a variable factor, optimal rule suggest that the sector should be paid a price which is equal to the value of marginal product of that factor. Here the factor is seeds. We will be finding the marginal product of factor seeds and multiply it by 7 which is the price of the fruit. You will continue to use more and more seeds till the value of marginal product of seeds exceed the wage rate which is 20. This occurs till 18 Shades are purchased and hired. The marginal product is 4 and the value of marginal product is 28 which is greater than the price of $20.
B) if the price of seeds increases to 40, 16 seeds will be used because its marginal product of seeds is 6 and value of marginal product is$42. This is greater than the wage rate which is 40.
3) if land and seeds are substitutes and the price of land increases, then farmer will replace land with seeds. This will increase the demand for seeds.
If the are compliments then when the price of Land would rise, the demand for seeds will fall because they are used together
The demand can shaped with an increase in the income of the farmer, chang in preferences of the farmer, addition of more farmers etc.
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