Suppose that Kuhner Rice Farms owns all the rice-
producing land in the small country of Kuhnlandia, and that there are no
imports of rice allowed into Kuhnlandia.
A. Kuhner Rice is making economic profit currently on its sales of rice.
Graph its profit/loss situation in rice sales and label price and quantity.
Shade and label the areas of economic profit, consumer surplus,
producer surplus, and deadweight loss.
B. The government becomes concerned that Kuhner Rice is price-gouging
on a staple food item like rice. The government decides to regulate the
price of rice using average cost pricing method (see p. 396-398) at $2 a
bag. Make a new graph showing the regulated price and quantity. Again,
shade the area of profit or loss, consumer surplus, producer surplus, and
any deadweight loss.
C. Under the new regulations, Kuhner Rice decides that it is no longer
profitable to produce rice. It sells off its rice farms, which allows many
small rice farmers to pop up and compete in Kuhnlandia. Create a new
graph which labels the new price and quantity in a perfectly competitive
market. (Hint: Draw the classic monopoly graph but show price and quantity if
it were competitive. Page 385 has a good graph for this. Note that Supply =
MC! This is important to note because suppliers won't supply at prices that are
below their marginal costs.)