Agricultural markets are the typical example of competitive markets: millions of producers with little to no market power, no product differentiation, free entry and exit, perfect information about the identical nature of the products offered by different producers. Agricultural markets satisfy all of these criteria.

The crop seed market for commercially produced plants such as corn, cotton, soybean, canola etc. used to be close to perfectly competitive before 90s. As will be explained in the next question this market got less and less competitive since then.

For the purpose of this question, consider a seed producer in Washington State in 1985 selling corn seeds. Suppose this company is making economic losses.

a. How does the price of corn seeds compare to the average total cost and the average variable cost of producing corn seeds in the short run? Draw the cost curves (average total cost, average variable cost, and the marginal cost) of this representative firm and the price of corn seeds to illustrate its situation in the short run? (10 pts)

b. Now suppose there is a positive demand shock for corn (ie: demand for corn increases) and so the price of corn seeds goes up. The corn seed producer in part-a begins making an economic profit. Draw the cost curves (average total cost, average variable cost, and the marginal cost) of this representative firm and the price of corn seeds to illustrate its new situation? (5 pts)

c. Now that the corn seed producer from part-a is making a profit, what will happen to the corn seed market in the long run? What will happen to the economic profit of an individual corn seed producer? What will happen the quantity supplied by each firm in this market (increase, decrease or ambiguous change?) and the total quantity supplied in the market? (5 pts)