Suppose a certain good (e.g., wheat) can only be sold at a central market place

Question

Suppose a certain good (e.g., wheat) can only be sold at a central market place M. All producers that do not produce it at M need to haul it there and will incur transportation cost. Consider the one directional von-Thünen model to the right only.

a) People are willing to pay $6 for the product; marginal production cost m equals 2. If the maximum distance at which people grow wheat is x*=16, what is marginal transportation cost t?

b) If wheat production were equally distributed over the entire distance between M and x*, you could calculate the sum of all costs, i.e., production w/o FC, transportation cost and rent as the areas of your chart; see the sketch below. For the data given at (a), calculate the size of these cost components.

Explanation / Answer

The individual demand curve represents the quantity of a good that a consumer will buy at a given price, holding all else constant. For example, consumer A might buy zero oranges at $1 each, one orange at 75 cents each, and two at 50 cents each, while consumer B might buy one at $1, two at 75 cents, and three at 50 cents. When charted on a grid with price on the vertical axis and quantity purchased on the horizontal axis, these points form the individual demand curves for consumers A and B.

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