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.

Draw(but do not submit)a picture of the LR market supply up to Q = 1800. Use the picture to find theproducer surplus at Q = 1700. Show that this is the same as sumof the profits of all the firms producing in this market. Would this have been true ifthis was a SR supply? Explain.

Answer 1

AC = MC =	10
Lots	80
No. of fruits	20
Total fruits	1600
Total Cost	16000
(upto 1600)
AC = MC =	25
Lots	40
No. of fruits	5
Total fruits	200
Total Cost	5000
(from 1600 to 1800)
Total Cost	21000
(upto 1800)

The shaded area is producer surplus for Q = 1700

To find the shaded area this area will be divided into 3 parts : 2 triangles and 1 rectangle as shown below

Area (1) = 1/2*base*height = 1/2*1600*16000 = 12800000

Area (2) = lenght*breadth = 1600*2500 = 4000000

Area (3) = 1/2*base*height = 1/2*100*2500 = 125000

Total Area = Producer Surplus = 16925000

The long-run is supposed to be a period sufficiently long to allow changes to be made both in the size of the farm and in the number of farmers in the industry.

Whereas in the short period, an increase in demand is met by over-using the existing farm, in the long-run, it will be met not only by the expansion of the farms of the existing farmers but also by the entry into the industry of new farmers.