Question

The production of agricultural products like wheat is one of the few examples of a perfectly competitive industry. This question analyzes results from a study released by the U.S. Department of Agriculture about wheat production in the United States in 2016.

A. The average variable cost per acre planted with wheat was $107/ per acre. Assuming a yield of 50 bushels per acre, calculate the AVC per bushel.
B. The average price of wheat received by farmers in 1998 was $ 2.65/ per bushel. Do you think the average farm would have exited the industry in 1998? Explain.
C. With a yield of 50 bushels of wheat per acre, the ATC per farm was $3.80/per bushel. The harvested acreages in the US for rye (a particular kind of wheat) fell from 418,000 acres in 1998 to 274,000 in 2006. Use the information on prices and costs here and In parts (a) and (b) to explain why this might have happened.

Answer 1

A) AVC per bushel of wheat = $107 / 50 = $2.14 per bushel of wheat

B) since the AVC was lower than the marginal revenue, then the average farmer would have continued in the business at least in the short run.

C) since the ATC is higher than the marginal revenue, in the long run many farmers will stop growing wheat and change to more profitable crops like soybean or corn. Total area of wheat has decreased by 43 million acres in the last 20 years, and more than 30 million of them have shifted to corn and soybeans.