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Question:
In the rural area of a country, there are many small farmers and each farmer plants corn in their own small pieces of land. Upon harvesting, they will deliver their corn to the town and sell to the large population of customers in the town. The corn farmers do not have any bargaining power in the price of their corn. The corn price is determined by market demand and supply but each farmer will have no problem selling all their corn at the market equilibrium price.
(a) Draw a suitable corn market and an individual farmer demand and supply diagrams to illustrate the initial situation in the corn market where all farmers are earning normal profit.
(b) Recently a reputed research institution publishes a report suggesting that consuming corn will help to prevent many illnesses. The government has encouraged the people to consume more corn. Examine and explain the effects on price and quantity of the corn market as well as the profit and output of the individual corn farmer in the short run. Support your answers with a suitable firm and market diagram.
(c) What will happen to your answers in (b) in the long run? Explain with a suitable firm and market diagram.
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