An agricultural engineer from Whitehall, Wisconsin has discovered a new method o

Question

An agricultural engineer from Whitehall, Wisconsin has discovered a new method of milk extraction that causes less swelling to a cow's udders, and therefore each cow has a faster recovery time between milkings. *Use a whole page for this, in landscape layout. If all dairy farms in a perfectly competitive milk market adopt this technology, graph the short run effects for both individual firms and the market overall. In words and graphical illustration (use the graph from part a), indicate the long-run effects of this technological advance.

Explanation / Answer

(a) As a result of this technological advance, when all dairy farms in a perfectly competitive milk market adopt this technology the market’s supply curve will shift rightwards in the short run. This is because now more milk can be produced due to fall in the recovery time between milkings. The market condition will look like:

The price will fall in the mrket, now firms will take this new lower price as given and determine their equilibrium. As in the short run no entry and exit is possible, firms will be minimizing losses.

In the long run, as firm entry and exit is possible and as a result of this technological change the external economies will change the cost conditions. Ultimately, in the long run, all firms will earn only normal profits. But now the market can produce the same outputr with lesser inputs or cost.

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