Summary 311in the market is given by the area under the demand curve and above
the market price line.- In equilibrium, a competitive market generates maximum net benefits.
The optimal level of output is determined by the intersection of demand
and supply, that is, where marginal benefit exactly equals marginal cost.
Questions and Problems
- The renowned Spaniard, Pablo Picasso, was a prolific artist. He created
hundreds of paintings and sculptures as well as drawings and sketches
numbering in the thousands. (He is said to have settled restaurant bills
by producing sketches on the spot.)
a. What effect does the existence of this large body of work have on the
monetary value of individual pieces of his art?
b. Might his heirs suffer from being bequeathed too many of his works?
As the heirs’ financial adviser, what strategy would you advise them to
pursue in selling pieces of his work? - Consider the regional supply curve of farmers who produce a particular
crop.
a. What does the supply curve look like at the time the crop is harvested?
(Show a plausible graph.)
b. Depict the crop’s supply curve at the beginning of the growing season
(when farmers must decide how many acres to cultivate).
c. Depict the crop’s supply curve in the long run (when farmers can
enter or exit the market). - Potato farming (like farming of most agricultural products) is highly
competitive. Price is determined by demand and supply. Based on U.S.
Department of Agriculture statistics, U.S. demand for potatoes is
estimated to be QD 184 20P, where P is the farmer’s wholesale price
(per 100 pounds) and QDis consumption of potatoes per capita (in
pounds). In turn, industry supply is QS 124 4P.
a. Find the competitive market price and output.
b. Potato farmers in Montana raise about 7 percent of total output. If
these farmers enjoy bumper crops (10 percent greater harvests than
normal), is this likely to have much effect on price? On Montana
farmers’ incomes?
c. Suppose that, due to favorable weather conditions, U.S. potato farmers
as a whole have bumper crops. The total amount delivered to market is
10 percent higher than that calculated in part (a). Find the new
market price. What has happened to total farm revenue? Is industry
demand elastic or inelastic? In what sense do natural year-to-year
changes in growing conditions make farming a boom-or-bust industry?
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