Micro Economics
Introduction, Questions 6-11
Questions 6 through 11 ask you to consider the general impact of the war in Ukraine on the market for wheat. The April 30, 2022 issue of The Economist had an article titled “Can Brazil help with food shortages around the world?”. You do not have to read the story to understand the setup of these questions. Carefully read each question to understand when these changes are introduced into the initial scenario. Here is what you should focus on to complete your analysis.
For this analysis, assume the wheat market is perfectly competitive, demand is downward- sloping, supply is upward-sloping, and production technology results in traditional U-shaped ATC and AVC curves.
Finally, for all questions, assume market price is always greater than the minimum of the AVC curve.
You will be using the same graph in all questions that require a graph (Questions 6, 8, and 10), with each question asking you to add new elements to the graph as part of your analysis.
Question 6: (25 points) (Graph Upload)
Assume that prior to the outbreak of the war in Ukraine, the wheat market was in Long Run Equilibrium (LRE).
Using our side-by-side graph methodology (with market on the left and individual firm on the right), graphically depict the market equilibrium P0 and Q0, the optimal output of an individual firm representative of the other firms in the industry at this LRE (labeled as q0), and the individual firm’s profit π0, if any (shaded and clearly labeled).
Reminder: Be sure to label all relevant points and axes.
Upload a single MS Word, Adobe PDF, or graphics file (JPEG, TIFF, PNG, BMP only) that does not exceed 5MBs with a graph as an answer to this question.
Question 7: (10 points) (Short Essay)
Refer to your graph in Question 6. Provide a brief narrative explaining the conditions that must be satisfied, including the profitability of an individual firm, in a perfectly competitive industry’s LRE. Explain what the firm’s economic profit is in this state and how it is achieved.
Question 8: (30 points) (Graph Upload)
Now analyze the impact of the war in Ukraine on the market for wheat. The war has dramatically decreased wheat production in Ukraine, one of the major producers of wheat prior to the war.
Assume the war significantly reduces the supply of wheat and that there are no changes to the demand for wheat.
On the same graph you produced in Question 6, graphically depict any changes affecting the market for wheat and any changes that impact the individual firm. Show the movements of the curves (if any) and the new Short Run Equilibrium (SRE).
Indicate the new market equilibrium P1 and Q1, the optimal output of an individual firm representative of the other firms in the industry at this SRE (labeled as q1), and the individual firm’s profit π1, if any (shaded and clearly labeled).
Reminder: be sure to label all relevant points and axes.
Upload a single MS Word, Adobe PDF, or graphics file (JPEG, TIFF, PNG, BMP only) that does not exceed 5MBs with a graph as an answer to this question.
Question 9: (10 points) (Short Essay)
Refer to your graph in Question 8. Provide a brief narrative explaining the movements and the resulting change in an individual firm’s profit, if any. Please make sure you address the changes in the market equilibrium quantity Q, market price P, and the individual firm’s profit- maximizing quantity q, if any.
Question 10: (30 points) (Graph Upload)
Assume the wheat market continues to experience the short-run supply disruption that you modeled in Question 8. However, farmers in the U.S. have been making planning decisions in the past few weeks and many are diverting land to wheat production away from corn and soybeans. The Economist article indicated that Brazilian farmers will make similar planting decisions, switching from corn and soybeans to wheat when they make their new season plans in September. Analyze the impact of this switch on the market for wheat.
On the same graph you produced in Questions 6 and 8, graphically depict any changes affecting the market for wheat caused by the decision of many U.S. farmers to grow more wheat. Assume that after these North and South American farmers ramp up their wheat production, the market will move to a new Long Run Equilibrium (LRE).
Indicate the new market equilibrium P2 and Q2, the optimal output of an individual firm representative of the other firms in the industry at this LRE (labeled as q2), and the individual firm’s profit π2, if any (shaded and clearly labeled).
Reminder: be sure to label all relevant points and axes.
Upload a single MS Word, Adobe PDF, or graphics file (JPEG, TIFF, PNG, BMP only) that does not exceed 5MBs with a graph as an answer to this question.
Question 11: (10 points) (Short Essay)
Refer to your graph in Question 10. Provide a brief narrative explaining the movements and the resulting change in an individual firm’s profit, if any. Make sure you address the changes in the market equilibrium quantity Q, market price P, and the individual firm’s profit maximizing quantity q, if any.
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