Assume that you have a representative farm producing wheat in a perfectly competitive market. The overall demand for wheat is made up of two components – domestic demand and foreign demand. Due to tariff disputes with the U.S., the European Union (EU) has urged its member nations to reduce their demand for U.S. agricultural products (including wheat). As a result, the foreign demand for U.S. wheat has declined by 20% this year. Using diagrams for a representative farm (i.e., wheat producer) and the market for wheat, analyze the impact of this decrease in foreign demand on the farm’s output and profit (loss) in the short-run and long run. Assume that the farm was in long-run equilibrium (i.e., earning zero economic profits) before the decrease in the foreign demand for wheat. Also, assume that the farm was facing a U-shaped AC curve and the typical upward-sloping MC curve. Provide a brief description of all the changes that occur and be sure to clearly denote those changes in your diagrams.
Assume that you have a representative farm producing wheat in a
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