1) Imagine you are the owner of a farm that grows and sells kilograms of okra, which can be modeled

after a perfect competition market. You know that there are 250,000 consumers in the market for

okra and that they each have a demand function for kilograms of okra (x) below. You also know that

you are one of 2,500 farms that each have the supply function for kilograms of okra (q) below:

x = 0.4 - 0.04 Px + 0.04 I + 0.4 Py

q = 20 + 0.4 Px - 4 PL + 40 K

a. What is the Market Demand function?

b. What is the Market Supply function?

c. What is the Equilibrium Market Price for a kilogram of okra?

*(Assume that PL = 25, K = 10, Py = 10, and I = 10,000)

d. What is the equilibrium quantity of kilograms of okra for the market? What is the profitmaximizing (quantity) kilograms of okra for a firm to sell?

e. At this short run equilibrium, what is the profit/loss the farm is making?

*(Assume that L = 100 and Pk = 100,000)

f. Graph the market and firm equilibrium. Your graph must include labeled axis, market demand,

market supply, market equilibrium quantity, market equilibrium price, firm demand, marginal

revenue, marginal cost, firm equilibrium quantity, firm equilibrium price, average total cost,

average variable cost (if relevant), and you must shade the area of profit/loss.

g. On the graph from part f, show the adjustment in the market and for the firm in the long run.

Explain in words what you show in your graph.

h. Calculate the income elasticity of market demand for okra. What does this mean economically?

Is this normal or inferior?

i. Calculate the (own) price elasticity of market demand for okra. What does this mean

economically? Is this elastic or inelastic?

j. Calculate the cross-price elasticity of market demand for okra. What does this mean

economically? Is this a substitute or a complement?