11. The production of agricultural products like wheat is one of the few example
ID: 1216380 • Letter: 1
Question
11. The production of agricultural products like wheat is one of the few examples of a perfectly competitive industry. In this question, we analyze results from a hypothetical study about wheat production in the US in 2001 and make some comparisons to wheat production in 2013. a. The average variable cost per acre planted with wheat was $107 per acre. Assuming a yield of 50 bushels per acre, calculate the average variable cost per bushel of wheat. b. The average price of wheat received by a farmer in 1998 was $2.65 per bushel. Do you think the average farm would have shut down in the short run? Explain. c. With a yield of 50 bushels of wheat per acre, the average total cost per farm was $3.80 per bushel. The harvested acreage for rye (a type of wheat) in the US fell from 418,000 acres in 1998 to 250,000 in 2010. Using the information on prices and costs here and in parts a and b, explain why this might have happened? d. Using the above information, do you think the price of wheat was higher or lower than $2.65 per bushel prior to 1998? Why?
Explanation / Answer
a. AVC = $107 per acre
Yield = 50 bushels per acre
AVC per bushel of wheat = 107 / 50 = $ 2.14
b. Since the average price received is more than the average variable cost, so the firm will not shut down in the short run as the price will cover average variable cost and also some part of the fixed cost.
c. Since the price is less than the average total cost per farm so the firms will earning losses and some firms will exit the industry in the long run, thus the acreage for rye will fall.
d. Prices of the firm should have been higher than the $2.65 prior to 1998 level. This is because the firms are exiting the industry which means that firms should have been part of the industry earlier and are now exiting.
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