MICROECONOMICS

Microeconomics

Microeconomics

Question A

The price and output will be at the minimum point of average total cost in 2007. By nature, many agricultural industries have perfectly competitive market structures. There are many agricultural producers and each of them produces the amount of output which is small relative to the total industry output. Therefore, these producers are price-takers and they do not have control over the market price. Due to the specificity of agricultural production processes, many agricultural industries face inverse demand. By the nature of potato production, the quantity of potatoes supplied to the market is a pre-determined variable. Therefore, by controlling the amount of potatoes supplied to the market, the industry may reach a targeted level of price. If we consider all agricultural producers acting collectively as a single entity, then the industry may be considered as a single monopolist. This monopolist faces inverse market demand and has market power over the market price.

Question B

The monopolist will have his MR under the demand curve. The point which MC=MR will be his optimum output and price. Under both perfect competition and monopoly, the profit is maximized when marginal revenue is equal to marginal cost. In the case of a perfectly competitive market, marginal revenue is equal to market price (i.e. inverse demand curve). In the case of a monopoly with a linear inverse demand curve, marginal revenue curve is twice as steep as the inverse demand curve. Therefore, to determine the profit-maximizing potato industry output and price in two scenarios, we need information on inverse demand and marginal cost (Abrantes, 2006).

To estimate potato inverse demand, the yearly data on Idaho potato prices received by potato growers and volume of potato production are used. These data are for all potatoes, which include both fresh and processing potatoes. The disaggregated data for these two types of potatoes are not available; therefore the inverse demand for all potatoes is estimated and analyzed. As mentioned earlier, fresh, seed and processing potato growers are affected by the programs of the United. Therefore, using data on all potatoes seems to be a reasonable strategy for the analysis. The data were collected from the USDA National Agricultural Statistic Service. Prices (P) are measured in $ per hundredweight (cwt) and quantities (Q) are measured in hundredweights. The data for a period of 1993-2004 are used to estimate a linear potato inverse demand. The estimated potato inverse demand is represented by equation

P = 10.886 - 0.000000045Q

Question C

The monopolist will produce less with higher price, and leap profits compared to A. To get an estimate of marginal cost of potato production, the following assumptions are made. The first assumption is that potato industry has a constant marginal cost. The second assumption is that in the two analyzed market situations the cost component of the profit function is the same, but the revenue component changes depending on whether the industry has a perfectly competitive or monopolistic market structure. In the perfectly competitive market environment, the industry profit is maximized when marginal ...