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Suppose that graph on the next page illustrates marginal, average variable and average total cost curves of a typical coffee grower and that wholesale market for coffee beans is perfectly competitive market.

A) As output expands, at what level of output does this grower first start to experience diminishing marginal productivity of labor? describe your answer in 1or 2 sentences.

B) Suppose that current market price at wholesale level is $5 per pound. How much coffee will this typical grower produce? Describe answer in one or two sentences.

C) Is there a price below which grower will not bother to cultivate & harvest his crop, but will just let beans rot on the tree? Describe your answer briefly.

D) Suppose that as industry expands (or contracts) prices of variable inputs it uses do not change. Is $5 per pound long run equilibrium price in this market? If so, describe why. If not, describe why not and recognize the long run equilibrium price.

E) Assume there is shortage of experienced farm labor in coffee growing regions, so that as industry expands the wages paid to farm labor rise. How would this affect conclusion in part (D) about long run equilibrium price of coffee?

Assume that technological innovation in coffee cultivation greatly reduced amount of labor used per ton of beans harvested but required farmers to invest in substantially more large scale capital equipment and computerized hydration management systems.

F) Draw diagram showing effect on typical grower's average total cost curve. (i.e. sketch a "before" and "after" ATC schedule). Determine the effect of this technological change on minimum efficient scale of production?

Microeconomics, Economics

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