Question

In: Economics

There are more than 500 almond growers operate in areas with rainfall(first firm) and 300 operate...

There are more than 500 almond growers operate in areas with rainfall(first firm) and 300 operate in drier areas(second firm). MC in the short run for the first firm is MC(Q) = 0.02 Q and for the second firm in short run MC(Q)= 0.04 Q. Assume that shut down price is 0.

  1. Derive the short run market supply for the both firms
  2. Assume market demand for almonds is given by the equation Q = 105,000-2500P, derive the equilibrium price and quantity for almonds.
  3. In equilibrium, how many almonds will each type of grower produce?

Solutions

Expert Solution

a.)

Put price equal to marginal cost since every almond grower will supply the quantity for which price equals marginal cost.

Thus,

For drier areas almond growers:

P = 0.04 Q implies Q = 25 P.....................(i)

For rainfall growers:

P = 0.02 Q implies Q = 50 P....................(ii)

Cummulative supply from rainfall growers and dry areas growers =

Qs = 500 * (50 P) + 300 * (25P) from (ii) and (i respectively) Given: 500 rainfall farmers and 300 dry farmers

QS = 25,000 P+7,500 P = 32,500 P

b.)

Market demand for almonds is given by equation:

QD = 105,000 - 2500 P .........................(iii)

For equilibrium price QS = QD

Thus,

32500 P = 105,000 - 2500 P

this gives 35000 P = 105,000

P = 3

Put P = 3 in (iii),

QD at equilibrium = 105,000 - 2500 * 3 = 105,000 - 7500 = 97, 500

Equilibrium price is 3 and quantity is 97500.

c.)

Rainfall growers will grow

500 * (50 P) = 500 * (50 * 3) = 500 * 150 = 75000

and

Dry area growers will grow

300 * (25 P) = 300 * (25 * 3) = 300 * 75 = 22500


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