The production of agricultural products like wheat is an example of a perfectly
ID: 2494752 • Letter: T
Question
The production of agricultural products like wheat is an example of a perfectly competitive industry. Answer each part of this question. 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 2014 was $2.65 per bushel. Do you think the average farm would have exited the industry 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 wheat in the United States fell from 418,000 acres in 2014 to 274,000 in 2015. 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 prices of wheat were higher or lower prior to 2014? Why?
Explanation / Answer
A. AVC per bushel of wheat = 107 / 50 = $2.14 per bushel
B. P = $2.65 per bushel is greater than the AVC. So, the firm will stay in the industry and not exit.
C. This is because firms are earning losses in this case as Average total Cost per bushel is more than Price per bushel. Even though the price will cover the Average variable Cost fully but out of the Average Fixed Cost of $1.66 per bushel, prices will cover only $0.51 per bushel. Thus, firm are reducing harvested acreage in the U.S.
D. Prior to 2014, Prices must have been higher than the present level because the area under wheat cultivation is high before 2014.
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