Problem
Consider a competitive market for red lentils with 100 identical farmers in Horsham Victoria, a competitive market price of $5 and the following
MC for each farmer:
MC = $0.05Q
Also consider the following market demand function:
QD = 1000 - 40P
1. Calculate the optimal level of production (in tonnes) for each farmer (show workings)
2. Assuming 100 lentil farmers of equal size how many tonnes of lentils in total will be supplied in the entire market? (show all workings)
3. Consider that the government now imposes a 25% tax on producers, calculate
a. the new equilibrium level of output for each firm (hint - think about how this affects each farmer's marginal cost), and
b. new total supply in the entire market (show all workings)