In: Economics
The production of agricultural products like wheat is one of the
few examples of a perfectly
competitive industry. In this question, we analyze results from a
study released by the
Pakistan Department of Agriculture about wheat production in the
Pakistan.
a. The average variable cost per acre planted with wheat was
Rs.1070 per acre. Assuming a
yield of 500 bushels per acre, calculate the average variable cost
per bushel of wheat.
b. The average price of wheat received by a farmer was Rs.2.65 per
bushel. Do you think the
average farm would have exited the industry in the short run?
Explain.
c. With a yield of 500 bushels of wheat per acre, the average total
cost per farm was Rs.3.80
per bushel. The harvested acreage for rye (a type of wheat) in the
Pakistan fell from 418,000
acres in 2004 to 274,000 in 2019. Using the information on prices
and costs here and in parts
a and b, explain why this might have happened.
d. Using the above information, do you think the prices of wheat
were higher or lower prior
to 2004? Why?
a. $2.14
Variable cost per acre = $1070
So average variable cos per bushel of wheat = 1070/ 500 =
$2.14.
b. No, average farm will not exit.
reason: Price is higher than AVC of $2.14 - the shutting down price. The firms will not exit. They are covering costs of production at price = $2.65.
c. Average toal cost = $3.80, but the price = $2.65. Farmers are undergoing losses in the short run. So those who cannot sustain the loss-making trade will have exited and shifted to where their opportunity cost is lower. Therefore, holding everything else constant, the number of farmers growing wheat decreased over the years.
d. Prices were higher prior to 2004. So, wheat farmers were making profits. Because of that, more farmers must have entered the wheat growing field. When quantity of wheat increased, it gave a downward push to the price. Prices fell and fell below the total cost, even below the break-even point, leading to many loss making farmers some of whom eventualy exited the wheat field.