Potato farming (like farming of most agricultural products) is highly competitive. Price is determined by demand and supply. Based on U.S. Department of Agriculture statistics, U.S. demand for potatoes is estimated to be QD = 184 - 20P, where P is the farmer’s wholesale price (per 100 pounds) and QD is consumption of potatoes per capita (in pounds). In turn, industry supply is QS = 124 + 4P.
a. Find the competitive market price and output.
b. Potato farmers in Montana raise about 7 percent of total output. If these farmers enjoy bumper crops (10 percent greater harvests than normal), is this likely to have much effect on price? On Montana farmers’ incomes?
c. Suppose that, due to favorable weather conditions, U.S. potato farmers as a whole have bumper crops. The total amount delivered to market is 10 percent higher than that calculated in part (a). Find the new market price. What has happened to total farm revenue? Is industry demand elastic or inelastic? In what sense do natural year-to-year changes in growing conditions make farming a boom-or-bust industry?