The production of agricultural products like wheat is one of the few examples of a perfectly competitive industry. In this question, we analyze results from a study released by the U.S. Department of Agriculture about wheat production in the United States in 1998.
a. The average variable cost per acre planted with wheat was $107 per acre. Assuming a yield of 50 bushels per acre, calculate the average variable cost per bushel of wheat.
b. The average price of wheat received by a farmer in 1998 was $2.65 per bushel. Do you think the average farm would have exited the industry in the short run? Explain.
c. With a yield of 50 bushels of wheat per acre, the average total cost per farm was $3.80 per bushel. The harvested acreage for rye (a type of wheat) in the United States fell from 418,000 acres in 1998 to 274,000 in 2006. Using the information on prices and costs here and in parts a and b, explain why this might have happened.
d. Using the above information, do you think the prices of wheat were higher or lower prior to 1998? Why?