Suppose a typical (representative) corn farm has a short-run production technology which results in the outcome of U-shaped Average Variable Cost (AVC), Average Total Cost (ATC), and Marginal Cost (MC). Further, suppose this firm sells its product in a market where the price of the good is determined by the interaction of market Demand and Supply (such as you depicted in Question #1). Because an individual firm is very small compared to the rest of the market, we treat the market price as the price given to the firm, and the individual firm cannot impact that price. Finally, for the entirety of Questions 3 through 5, assume we are in the Short Run for this firm. In graphing responses to Questions 3 through 5, put $ on the vertical axis and lower-case q (firm output) on the horizontal axis.

1.

In August 2020, the price of corn was theP₀you depicted in your answer to Question 1.

• Using the graphs ofAFC₀,AVC₀,ATC₀, andMC_0,show this original price,P₀, on this graph with$on the vertical axis and lower-caseq(firm output) on the horizontal axis. You should assume that this August 2020 priceP₀ishigherthan the minimum point of theATC₀you drew on your graph.
• Graphically indicate the profit maximizing outputq₀for this typical firm and explain how you determined this output.
• Whydoes it not make sense for the firm to produce either more or less than the profit maximizing outputq₀that you've determined? Please explain.

2. Using the same graph with theAFC₀,AVC₀,ATC₀, andMC₀,P₀andq₀:

• Graphically indicate the size of profits or losses (negative profits) at thisP_0,q₀outcome in August 2020.
• Explain why this graphical representation of profits correctlydepicts the profit made by the firm.

3.

In the March 2021Wall Street Journalstory referenced in Question #1, the author noted that the run up in grain prices of the past 6 months has now caused an increase in the price of farmland. Since farmland is one of the major inputs in production of corn, the higher price for land will increase every farmer's cost. Even if the farmer already owns land they previously purchased at lower prices, they have to recognize that the new higher price of land is their opportunity cost: they could just sell the land and receive the new higher price of land.

• Start with the sameAFC₀,AVC₀,ATC₀, andMC₀curves you used in Questions 3 and 4. Now show shifts in any of the cost curves, reflecting the higher cost of land (keeping in mind that this higher cost is independent of how much or how little corn is actually produced) and labeling the changed cost curves with a subscript 1. On the graph with$on the vertical axis and individual firm outputqon the horizontal axis, draw the newP₁you determined in Question 2 above. What is the new profit maximizing outputq₁for this typical firm?
• Graphically depict the size of profits or losses (negative profits) at the new priceP₁. Is the firm making positive or negative profits?

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