The annual demand curve for the perfectly competitive milk market is P = 9 - 0.01 Q. This market is in long run equilibrium. The price of milk is $2.00 and each of the producers operate at minimum long run average cost (LAC).
The LAC function for each individual identical farm can be represented by the equation where q is millions of gallons/year.
LAC = 3.00 -q + 0.25 q2
a) How many gallons of milk are sold per year?
b) What is the dollar value of consumer surplus?
c) Assume that a new technology causes the LAC function for dairy farming to change to:
LAC = 2.7 - 1.2 q + 0.3 q2
d) In the new long run equilibrium, how will the nu mber of farms change?
e) In the new long run equilibrium, how will the production of each farm change?
f) In the new long run equilibrium, how will the expenditure on milk change?
g) Ignore the technology change and demand function change stated above. Assume that a monopolist buys all of the dairy farms. The monopolist has LAC = LMC which coincides with the long run supply curve (LS = $2) under perfect competition. What is the profit-maximizing price-quantity combination?
h) What is the dollar value of the deadweight loss from monopoly?