Question

2.   Assume the market for soybeans is perfectly competitive and in long-run equilibrium, and Norma’s Soybeans is a small farm in the market.

1. Draw correctly labeled side-by-side graphs of both the market for soybeans and the firm, labeling the market equilibrium Pm and Qm and Norma’s Soybean equilibrium Pf and qf.

2. Is Norma’s Soybeans earning economic profits, economic losses, or a normal profit?

3. Now assume that in the soybean market there is a huge drought that ruins the soybean harvest of thousands of farmers (but not Norma’s). Show on the same graph as above, what would happen to the new equilibrium price and quantity in both the market and firm., labeling the firm PM2 and QM2 and Norma’s soybeans Pf2 and qF2.

4. Shade the area of economic profit or loss for Norma’s soybeans at the new equilibrium.

Answer 1

Ans-2) Perfect - competition-:

a)

In the figure , market is initially at equilibrium at point E where market price is Pm and Market equilibrium quantity is Qm. The Norma's Soyabean is a small firm and takes price from the market at Pf . The firms's equilibrium is at the point e where MR=MC=AR.

b) Norma's Soyabean is earning Normal Profits as Price = Average Cost . The firm is in long - run equilibrium.

c) Due to drought Soyabean crops are ruined. It decreases the supply of soyabean in the market from S to S2(shown in figure). Hence the prices rise to PM2. This increased prices are taken by Norma's Soyabean as Pf2 . The equilibrium quantity of market decreases from Qm to Qm2. Due to rise in prices, Norma's (firm) prices increase to Pf2 and AR=MR curve shifts to AR1=MR1. At this increased price , new firm equilibrium is at e2. The equilibrium quantity of firm increases from Qf to Qf2 . The firm (Norma's Soyabean) earns economic profits as now price>Average cost.

New price of market = Pm2

New quantity of market = Qm2(decrease)

New price of firm = Pf2

New quantity of firm = Qf2 (increase)

d) Please find the shaded profit region in above diagram -: Rectangle ae2bc