Question

Suppose that the demand for bananas is given by: Qd(p) = 1,500,000 – 50000p where Qd(p) is quantity demanded in kilograms of bananas and p is the price. Further suppose that there are many identical sellers in the domestic market who can each choose to plant bananas. If a seller chooses to produce bananas, she will incur a planting cost of $2.00 per kilogram at the beginning of the year and must pay an additional $0.50 per kilogram to harvest the bananas at the end of the year at the optimal farm scale of 12,500 kg of bananas. You may assume that the planting cost includes the opportunity costs associated with the allocated land. Thus, at the 2 beginning of the year (when both planting and harvesting costs are part of total opportunity cost), the total amount of bananas planted is given by: Qs(p) = { 0 if p < 2.50 [0, ∞] if p = 2.50 ∞ if p > 2.50 } Note that supply can be drawn as a straight horizontal line at a price of $2.50 Draw the supply and demand system and clearly mark the equilibrium outcome. Shade in the area that is the consumer surplus

Answer 1