In the crop year that ended last March (called 20X1), the wheat harvest was normal. Farmers did not have good weather and the harvest was not abundant, but the price was good; US$ 145 per kilo. A total of 8.25 million kilos were harvested.

Assume that the supply was completely inelastic to the price, and that for the new year (called 20X2) a 40% increase in the harvest is expected: 11.55 million kilos.

a) With respect to the price of wheat in 20X2, will the price increase, decrease or remain unchanged?

b) Assuming that: 1) the new supply is completely inelastic to price; 2) demand is straight; 3) the price elasticity of demand is E = -0.85 at the market equilibrium point in year 20X1; 4) demand neither increases nor decreases. Accordingly, we ask:

2.1) Obtain the mathematical equations of demand and supply for the year 20X1.

2.2) Obtain the demand equation for the year 20X2, knowing that demand does not change, and thus also obtain the supply equation for the year 20X2.

2.3) Obtain the expected price of wheat for the year 20X2.

c) Given the price prediction you obtained in 2.3), will farmers' incomes increase or decrease, and knowing that the harvest will be abundant, are incomes predicted to increase, decrease, remain unchanged?

(d) How should the company react?

Should it prepare to decrease or increase its production, increase or decrease its income?

Hint: related to the Bountiful Harvest Paradox