micro-economics ---price...diminishing marginal..

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Assume that the graph illustrates the marginal, average variable and average total cost curves of a typical soybean grower and that the wholesale market for soy beans is a perfectly competitive market.

1) As output expands, at what level of output does this grower first start to experience diminishing marginal productivity of labor?

2) Assume that the current market price at the wholesale level is $5 per pound. How much soybean will this typical grower produce?

3) Is there a price below which the grower will not bother to cultivate & harvest his crop, but will just let the beans rot on the tree?

4) Assume that as the industry expands (or contracts) the prices of the variable inputs it uses do not change. Is $5 per pound the long run equilibrium price in this market? If so, explain why. If not, explain why not and identify the long run equilibrium price.

5) Suppose there is a shortage of experienced farm labor in the soybean growing regions, so that as the industry expands the wages paid to farm labor rise. How would this affect your conclusion in part (4) about the long run equilibrium price of soybean?

6) Suppose that technological innovation in soybean cultivation greatly reduced the amount of labor used per ton of beans harvested but required farmers to invest in substantially more large scale capital equipment and computerized hydration management systems.
Draw a diagram illustrating the effect on the typical grower's average total cost curve. (i.e. draw a "before" and "after" ATC schedule). What is the effect of this technological change on the minimum efficient scale of production?
tinypic . com/r/11m7urb/5


  • micro-economics ---price...diminishing marginal.. -

    1) at the minimum of the MC curve.
    2) Where MC=MR and MR is price.
    3) Sure, at any price below the minimum of the AVC curve
    4) The industry will expand until Price equals the minimum of the ATC curve. (Assuming this particular soybean grower doesnt have a particular advantage or disadvantage. That is, any other soybean producer will have the same cost structure.)
    5) As the industry expands, all of the MC,AVC, and ATC cost curves shift up. So, equiliburium will occur where price=min ATC (for the marginal firm), however, ATC will be higher than shown on the graph.
    6) I would think a machine as described would have much less diminishing marginal returns. So, the ATC curve would be much flatter, the new minimum point being to the right of the only minimum point

  • micro-economics ---price...diminishing marginal.. -

    could you please explain questions 4 and 5? those are a bit unclear.

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