Draw a supply and demand diagram for the corn market

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Reference no: EM131084700

Consider the perfectly competitive Corn industry. It is initially in long run equilibrium at quantity Q0 and price P0.

a) Draw a supply and demand diagram for the Corn market showing this equilibrium.

b) Draw a diagram for a typical firm in its initial long run equilibrium, showing its Marginal Cost, Average Total Cost, and Long Run Average Cost curves. Are any profits being made by this firm?

c) A major use for Corn in Canada and the United States is to produce ethanol for use as a gasoline additive. Suppose that a new technology allows for the production of ethanol from trees, which is MUCH more efficient than producing ethanol from Corn. What happens to your diagram in part (a)? Use your diagram from part (b) to show how the firm reacts to this new situation. Are any profits being made by this firm?

d) Explain how this industry adjusts to its new long run equilibrium using both the diagrams from parts (a) and (b). (You may assume that it is a constant cost industry)

Reference no: EM131084700

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