The Market for Wheat Consists of 500 Identical Firms, Each

question 128

Essay

The market for wheat consists of 500 identical firms, each with the total and marginal cost functions shown:
TC = 90,000 + 0.00001Q²
MC = 0.00002Q,
where Q is measured in bushels per year. The market demand curve for wheat is Q = 90,000,000 20,000,000P, where Q is again measured in bushels and P is the price per bushel.
a. Determine the short-run equilibrium price and quantity that would exist in the market.
b. Calculate the profit maximizing quantity for the individual firm. Calculate the firm's short-run profit (loss) at that quantity.
c. Assume that the short-run profit or loss is representative of the current long-run prospects in this market. You may further assume that there are no barriers to entry or exit in the market. Describe the expected long-run response to the conditions described in part b. (The TC function for the firm may be regarded as an economic cost function that captures all implicit and explicit costs.)

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Definitions:

Futures Price

The agreed-upon price for the future delivery of a particular commodity, financial instrument, or currency.

Risk-free Rates

Theoretical return rates on an investment assumed to have no risk of financial loss, typically represented by the yield on government securities.

Spot Exchange Rate

The spot exchange rate is the current price at which one currency can be exchanged for another for immediate delivery.

Futures Price

Futures Price is the agreed-upon price for the purchase or sale of a particular asset at a future date, determined in the futures market.