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Econ 101A — Midterm 2 Th 8 April 2009. You have approximately 1 hour and 20 minutes to answer the questions in the midterm. I will collect the exams at 11.00 sharp. Show your work, and good luck! Problem 1. Production (38 points). Consider a farmer that produces corn using labor. The labor cost in dollar to produce y bushels of corn is c(y) = Cy2 ,with C0.There are 100 identical farms which all behave competitively. Corn sells at a price p per bushel. 1. Derive the marginal cost c0 (y) and the average cost c(y) /y.Plot them. Derive graphically the supply curve. (Have the quantity y on the horizontal axis). (5 points) 2. Write the expression for the supply of corn y(p) for each firm, and derive the expression for the aggregate supply function YS (p) (5 points) 3. From now on, suppose that the demand curve of corn is D(p) = 200 −50p and assume C = 1.Derive ∗ S∗ the equilibrium price p and total quantity sold Y . (5 points) 4. Derive the profits of each firm. (5 points) 5. Now assume that land is not free, and that the farmers are renting the land from a monopolist (that is, there is only one land owner, and it is impossible to rent land somewhere else). How much will the land-owner charge each of the farms? Explain. (8 points) 6. Taking the rent of the land into account, how much are the profits of each firm? (4 points) 7. In what sense there is a parallel between the presence of rents in the land and the entry of firms in the long-run equilibrium? (6 points) Solution of Problem 1. 1. c0 (y) = 2Cy and c(y) /y = Cy. Since marginal cost is always larger than average cost, the supply curve is the marginal cost curve. See graph in