Answer to Question #146534 in Microeconomics for Tricia

Question

Rice is produced under perfectly competitive conditions. Individual farmers have U-shaped, long-run average cost curves that reach a minimum average cost of $3 per bushel when 100 bushels are produced. If the market demand curve for rice is given by Q=2600-200P, what is the long-run equilibrium price of rice? How much rice will be demanded and how many rice farms will there be? Support your answer with a relevant diagram.

Answer 1

In the long run, price equals minimum average total cost, hence p=3. Equating supply and demand,

Q_S = Q_D= 2600-200×3 = 2000

Since each farmer produces 100 bushels, we must have 20 farms to give a quantity of 2000 bushels.