Question

a) Say a wheat farmer from the Midwest wants to increase his total revenue. In this perfectly competitive market where there are many farmers selling wheat, the going price for wheat is $10 a bushel. Do you think this farmer can increase his total revenue by raising the price he charges for wheat? Why or why not?

b) If that farmer lived in a community where he was the only supplier of wheat and if wheat was the primary food source for the community, do you think he could increase his total revenue by raising the price he charges for wheat? Why or why not?

Answer 1

a) In the perfectly competitive market, the farmer would be one of the many sellers who produce the same type of good and so if he increases his prices, no customer will buy his good and they would simply choose another seller so, if he increases the price for wheat, he would end up losing all his customers as the producers in a perfectly competitive market are regarded as price takers who sell the identical goods so they take the market price as the price for their goods and set P=MC for profit maximization.

b) In the monopoly market, the farmer would be the sole seller and the market demand would be his demand curve where his goods have no competition from the other sellers and so, he can set his own prices, therefore he can raise the price for the good and increase his revenue.