Question

Assume that a particular fruit is bought and sold in a perfectly competitive market. Each farm is 1 acre in size and there are 120 acres on which this fruit is grown. On 80 of the lots, the AC = MC = $10 and each acre lot can produce a maximum of 20 units of fruit each year. On the other 40 acres AC = MC =25 and each acre lot can produce a maximum of 5 units of fruit in a year.

1.Assume both types of land use the exact same quantity of all inputs. Assume that current costs are based on all land being the same rental price = $50 per acre per year. Given the results in (a), what should be the true rental price of an acre of good land? If this was used as the cost of good land in the cost calculations, what would happen to the economic profit on the good land?

Answer 1