c.
Only the average total cost curve shifts. The average
variable cost curve remains unchanged since the mort-
gage payment does not alter the variable cost. Simi-
larly, the marginal cost curve is not affected by the
increase in the fixed cost.
d.
The change in interest rates has no effect on the pro-
ducer’s decision of how many potatoes to produce in
the short run because
MC
does not shift. (However, if
the increased interest rate will increase the total cost
of production above total revenue, leading to a nega-
tive economic profit, then the potato grower would
shut down in the long run.)
e.
The potato grower’s profit decreases. The total revenue remains unchanged but the total cost of production
increases as a result of the increase in fixed cost.
f.
The grower’s short run supply is the
MC
curve above
AVC
. Since neither the
MC
curve nor the
AVC
curve shifted,
the short run supply curve is unaffected.
13. Five hundred small almond growers operate in areas with plentiful rainfall. The marginal cost of producing almonds
in these locations is given by
MC
=
.02
Q
, where
Q
is the number of crates produced in a growing season. Three hun-
dred almond growers operate in drier areas where costly irrigation is required. The marginal cost of growing almonds
in these locations is given by
MC
=
.04
Q
.
a.
Find the individual supply curve for each type of almond grower. (
Hint:
Remember that the supply relationship
expresses the quantity brought to market at various prices. Remember also that for a competitive firm,
P
=
MR
.)
b. “Add up” the individual supply curves to derive the market supply curve.
c.
If the market demand for almonds is
Q
d
=
105,000
–
2,500
P
, what will the equilibrium price of almonds be? The
equilibrium quantity?
d. How many almonds will each type of almond grower produce at that price?
e.
Verify that the total production of all almond growers equals the equilibrium quantity you found in part (c).
13. a.
Each almond grower will supply the quantity at which price equals marginal cost. Set price equal to marginal cost,
and solve for
Q.
Rainy-area growers:
P
=
.02
Q
, so
Q
=
50
P
Dry-area growers:
P
=
.04
Q
, so
Q
=
25
P
b.
Multiply each supply function by the corresponding number of growers, and then find the sum for all firms:
Q
S
=
500(50
P
)
+
300(25
P
)
=
25,000
P
+
7,500
P
=
32,500
P
c. Set
Q
s
=
Q
d
in order to find the equilibrium price:
32,500
P
*
=
105,000
–
2,500
P
*
35,000
P
*
=
105,000
P
*
=
3
Use
P
*
=
3 in either equation to find the equilibrium quantity:
32,500(3)
=
105,000 – 2,500(3)
=
97,500
d.
Rainy-area growers will grow 25,000(3)
=
75,000 crates. Dry-area growers will grow 7,500(3)
=
22,500 crates.
e. The sum of 75,000 and 22,500 is 97,500, as found in part (c).
Quantity
of potatoes
MC
ATC
1
ATC
2
AVC
Price
& cost
($/pound)
7,000
5,000
3,000
1,000
$3
0
*
*