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Market exchange with production

Market Exchange With Production

The table below shows the quantities of product X that a producer can produce in one growing season on a 1 acre farm using different amounts of labor. The dollar values assume that the land rents for $100 and labor's wage is $300 per growing season.

Land Labor Total Output Marginal Product Total Variable Cost Total Cost Marginal Cost Average Variable Cost Average Total Cost
1 0 0 0 100
1 1 6 6 300 400 50.00 50.00 66.67
1 2 13 7 600 700 42.86 46.15 53.85
1 3 21 8 900 1000 37.50 42.86 47.62
1 4 30 9 1200 1300 33.33 40.00 43.33
1 5 38 8 1500 1600 37.50 39.47 42.11
1 6 45 7 1800 1900 42.86 40.00 42.22
1 7 51 6 2100 2200 50.00 41.18 43.14
1 8 56 5 2400 2500 60.00 42.86 44.64
1 9 60 4 2700 2800 75.00 45.00 46.67
1 10 63 3 3000 3100 100.00 47.62 49.21
1 11 65 2 3300 3400 150.00 50.77 52.31

This next table is a marginal value table for one individual for product X. MV is measured in dollars. Use these two tables to answer the last question.

Quantity of X per growing season Marginal Value
1 150
2 137
3 100
4 92
5 84
6 75
7 60
8 50
9 43
10 37

Suppose that there is a market for X that consists of 10 identical producers, each with the same production costs as shown in the table above. In this market there are also 100 consumers, each with the marginal value as shown in the mv table above. Assume that all transaction costs are zero and traders will trade when indifferent:
a. What will be the equilibrium price for product X?
b. How many units of X will each producer produce?
c. How much profit will each producer earn?
d. How many workers will each producer employ?
e. If the government thought that the price you determined in 5a was "unfair" and passed a law saying the price could not be greater than $43,
would there be a shortage or a surplus in this market?

Solution Preview

Let us start with the consumer. A consumer will purchase X only if MV > P. Let's say we are looking for the position at which MV = P.

Quantity of X per growing season Marginal Value
1 150
2 137
3 100
4 92
5 84
6 75
7 60
8 50
9 43
10 37

You can calculate the demand in the following manner. If, using the table above, the price is less than each unit MV for each person, you can assume that they will buy it. So, if the price is ...

Solution Summary

The market exchanges with productions are examined. The total variable costs are provided.

$2.19