Answer to Question #147624 in Microeconomics for yeno

Question

The state of Kansas, is increasing the cost of fungicide and insecticide used by growers of blueberries. The most impacted will be Shawne County growers, who produce about 80% of the nation’s crop.
Illustrate this situation with graphs for the blueberries market and the Shawne County grower. Start with the situation in long run equilibrium before the cost of fungicide and insecticide increase. Next, show and discuss the short run and long run effects of the fungicide and insecticide cost increase. Explain with words + graphs.

Answer 1

The market of blueberries can be considered as a perfectly competitive market structure because there are many firms small firms in this market structure producing identical blueberries and therefore the growers of the blueberries take the market price of the blueberries is given and act as a price taker. In the long-run equilibrium, every grower charges the price of the blueberries which is equal to the average cost of production and the marginal cost of production or in other words price of blueberries become equal to the minimum of the average cost of production and every grower in the blueberries market earn zero economic profit in the long run. The long-run equilibrium price of blueberries is determined in the market of blueberries and at the equilibrium price market demand for blueberries becomes equal to the market supply of blueberries.

The figure below shows the market of blueberries(right-hand side figure) and the market of the single grower in the blueberries market(left-hand side figure). As we know initially the growers in the blueberries market is operating at their long-run equilibrium position shown by point "a" in the figure below and at this point equilibrium price(P0) is equal to the minimum of the average total cost(ATC) and hence equal to marginal cost(MC) and the equilibrium quantity produced by any grower in this market is "q0" and at this price-quantity combination, every grower is earning zero-economic profit in the long-run. The market of blueberries is also in the long-run equilibrium at point "A" in the figure below as at point market demand curve is intersecting the market supply curve and the equilibrium price is "P0" and the equilibrium market

The Shawne county growers produce around 80% of the nation's crop and therefore they can be taken as a monopoly section of the blueberries growers because their output decision is able to greatly affect the market price of blueberries. A monopoly maximizes profit by producing at an output level where marginal revenue becomes equal to marginal cost. In the figure below point "A" shows the initial equilibrium point for the Shawne county growers and at this point price of blueberries is "P0" and the quantity is "Q0". When the state of Kansas increases the cost of fungicide and insecticides then the cost of production of Shawne county growers is going to increase and the marginal cost curve is going to shift upwards from "MC" to "MC1" and the average cost curve is going to shift upwards from "AC" to "AC1" and in the long-run equilibrium Shawne county growers are going to produce at point "B" and market price of blueberries is going to increase from "P0" to "P1" and the quantity produced will fall from "Q0" to "Q1" for the Shawne county growers. For the monopoly market there is no distinction between long-run and short-run as they can earn positive economic profits both in long-run and short-run.