Econ 390

Land Economics
Econ 202 style

Part I
The production function shows the relationship (a mathematical equation) between the
amount of inputs and the amount of output produced. Our focus will be on the land-
output relationship for a given level of capital and labor.

N. P. Maplewood is a farmer with one tractor. The amount of land will determine how
much she can harvest.

The data in the table below represents possible daily output of soybeans for various
combinations of the variable output (land) with the two fixed resources (labor (herself)
and capital(the tractor)).

Units of the Units of the Fixed Total Marginal Average

Variable Factor Factor Product Product Product
(Land) (Labor & Capital) (TP) (MP) (AP)
0 2 0 --
1 2 2
2 2 7
3 2 15
4 2 25
5 2 40
6 2 50
7 2 58
8 2 63
9 2 65
10 2 66

Complete the table.

 Base on the table on page 1, graph the Answer the following questions based
short-run production function, the on your table and graphs.
relationship between output and land, in
the top graph and both the marginal and 1. State clearly and concisely the Law
average products of labor in the bottom of Diminishing Marginal
graph. Productivity.

Production Function
70

60

50
2. Does the marginal product of labor
40 increase, decrease, or not change for
between 0 and 5 workers?
30
3. Does the marginal product of labor
20 increase, decrease, or not change for
more than 5 workers?
10

4. How many units of labor will result

1 2 3 4 5 6 7 8 9 10
in maximum:
Marginal Product & Average Product
14 1. Total Product ____________

12 2. Marginal Product ____________

3. Average Product ____________

10
5. Do technological improvements
8 prevent or simply cushion the effects
of diminishing marginal
6 productivity? Why?

6. How would an increase in

1 2 3 4 5 6 7 8 9 10 technology affect the table and your
graphs?
Part II
N. P. Maplewood has just come to the realization that her father will not let her use his
land for free. Further, her parents have informed her that she must pay rent to use the
tractor. Apparently, N.P. expected her parents would just provide everything forever. She
has learned that producing goods involves costs. We will explore her marginal product in
relation to her marginal costs in this worksheet.

N. P. must pay her father $20 per acre to grow soybeans and she must pay her parents
$100 for rent to be allowed to use the tractor. Fill in the blanks below.

Units of the Total Marginal Fixed Variable Total Marginal

Variable Product Product Costs Costs Costs Costs
Factor (TP) (MP) (FC) (VC) (TC) (MC)
(Land)
0 0 -- --
1 2
2 7
3 15
4 25
5 40
6 50
7 58
8 63
9 65
10 66
Answer the following questions:

1. The law of diminishing marginal productivity begins with what acre of land? ___

2. Define Marginal Costs in everyday language.

3. Marginal costs first __________ and then __________. This pattern occurs because
marginal productivity first _________ and then __________.
 Graph the Fixed Cost, Variable Cost, and Total Cost on the graph below.
300
5

200

100

10 15 20 25 30 35 40 45 50 55 60 65 70

1. The fixed cost curve (increases, decreases, does not change) ________________.

2. The total cost curves starts by increasing at an (increasing, decreasing) _________

rate and continues increase but at an (increasing, decreasing) ____________ rate.

3. What causes the pattern described in problem 2?

Part III
N. P. Maplewood just watched AgPhD on tv and has just learned about average costs and
marginal costs and is trying to relate them to her farm. We will explore her average costs
in relation to her marginal costs in this worksheet.

Units of the Total Fixed Variable Total Average Average Average Marginal
Variable Product Costs Costs Costs Fixed Variable Total Costs
Factor (TP) (FC) (VC) (TC) Costs Costs Costs (MC)
(Land) (AFC) (AVC) ATC)
0 0
1 2
2 7
3 15
4 25
5 40
6 50
7 58
8 63
9 65
10 66

Use this information to complete the graphs and questions on the follow page.
 Marginal Cost on the graph below. Notice the scale on the Y-axis. Some of the values
are too great to be included on the graph, but you can estimate the shape of the curves
after you have obtained some points on the graph

20
Costs 5

10

10 15 20 25 30 35 40 45 50 55 60 65 70
Output

1. Describe the shape of the average fixed cost.

2. Describe the shape of the average variable cost and the average total cost.

3. Approximately where do the marginal cost and average total cost curves cross.

4. What is the relationship between the marginal cost curve and the total cost curve.

When the marginal cost curve is (above, below) ___________ the average total cost,
average total cost is (increasing, decreasing) ___________ and when the marginal
cost curve is (above, below) _________ the average total cost, average total cost is
(increasing, decreasing) ___________.
Part IV
N. P. Maplewood is at it again. This time she has made a great discovery in the back of
her father’s farm. There is a sprayer under a tarp in the back corner of a shed; before the
bugs just had a feast on her beans. This discovery has no effect on the amount of rent she
must pay her parents, but this technological improvement has greatly increased her land’s
productivity. We will explore technological improvement in this worksheet.

With the improvement in technology, she now has greater marginal productivity from her
labor. Below are the new number, fill in the blanks and compare the results to the table
on the previous page.

Units of the Total Fixed Variable Total Average Average Average Marginal
Variable Product Costs Costs Costs Fixed Variable Total Costs
Factor (TP) (FC) (VC) (TC) Costs Costs Costs (MC)
(Labor) (AFC) (AVC) ATC)
0 0 -- -- -- --
1 3
2 10.5
3 22.5
4 37.5
5 60
6 75
7 87
8 94.5
9 97.5
10 99
 Graph the old and new Average Total Cost and Marginal Cost in the graph below. Use a
pencil for the old costs and a pen for the new costs.

20
5

10

10 15 20 25 30 35 40 45 50 55 60 65 70
Part V
N.P has received her first orders for soybeans, some tofu factory in China. Unfortunately,
her father needs his sprayer. Now she is back to the old production function with the
bugs munching away. We will explore profit maximization in this section. The current
price for soybeans is $10. Fill in the blanks below.

Units of the Total Fixed Variable Total Total Total

Variable Product Costs Costs Costs Revenue Profit
Factor (TP) (FC) (VC) (TC) (TR) ()
(Labor)
0 0
1 2
2 7
3 15
4 25
5 40
6 50
7 58
8 63
9 65
10 66

1. What is the maximum profit she can earn?

2. At what production level are profits maximized?

3. What demand-side change would increase her profits? Provide a hypothetical

example.

4. What supply-side change would increase her profits? Provide a hypothetical

example.
 Graph the Total Cost and the Total Revenue. Show the profit maximizing output.
300
5

200

100

10 15 20 25 30 35 40 45 50 55 60 65 70
5. Assume that the price of soybeans has increased. Which curve will be affected?

6. Draw a new total revenue curve to illustrate an increase in price. Find the new profit
maximizing point.

7. Assume that N.P parents realize that she is not frequently changing oil in the tractor
and the tractor is depreaciating. They decide to increase the rent on the tractor.
Which curve will be affected?

8. Draw a new total cost curve to illustrate an increase in costs. Find the new profit
maximizing point.
9. Provide a mathematical definition for marginal cost.

10. Define marginal costs in “everyday” language.

11. Provide a mathematical definition for marginal revenue.

12. Define marginal revenue in “everyday” language.

Part VI: Perfect Competition

There are currently one thousand producers of soybeans, each with identical economic
costs like those in diagram A below. (I changed the costs so that you can use a more
stereotypical U-shaped curve.) The market demand for soybeans is shown in diagram B
below.

A. Cost Situation for B. Market Supply and

Each Soybean Producer Demand for Soybeans

(thousands of soybeans per week) (millions if soybeans per week)

A. Plot on diagram B the current market supply curve for soybeans and label this curve
“S”. (Ask how much each producer will supply at the various prices, and figure how
much the total supply from all thousand producers together will be at those prices.
Note one million is a thousand thousand.)
B. Place a dot at the minimum of the average total cost and the average variable cost.
Remember that those points represent the minimum level and if we are not at those
 points the average cost **must** be greater than the minimum. This is important
later when you are asked to approximate prices.
C. Shade in the appropriate profit (or loss) in diagram A, and calculate the total amount
of economic profit or loss each typical soybean producer will make under those
conditions. Fill in the blanks below to aid in your calculation.

Price (P) received by each Soybean producer $_____________

Quantity (Q) produced by each Soybean producer: _______ thousand Soybeans.

Average total cost (ATC) for this quantity (approximate): $________ per Soybean.

Total revenue for each Soybean producer: $_____________

Total cost for each Soybean producer: $______________

Total profit for each Soybean producer: $______________

D. Based on your last answer, is the Soybean market in long-run equilibrium? Why or
why not?

E. What is the long run equilibrium price in this market? $________ per Soybean

How many Soybeans will each firm produce at this price? _________ thousand
Soybeans per week.

How many firms will be in the market at this price? __________

 Part II

Now, let us start over again with a new set of cost and demand conditions in the Soybean
market. We start again with one thousand producers of Soybeans, each with economic
costs list those shown in diagram A below. The market demand for Soybeans, however,
has changed and is shown in diagram B below.

A. Cost Situation for B. Market Supply and

Each Soybean Producer Demand for Soybeans

(thousands of soybeans per week) (millions if soybeans per week)

A. Plot on diagram B the current market supply curve for soybeans and label this curve
“S”. (Ask how much each producer will supply at the various prices, and figure how
much the total supply from all thousand producers together will be at those prices.
Note one million is a thousand thousand.)
B. Place a dot at the minimum of the average total cost and the average variable cost.
Remember that those points represent the minimum level and if we are not at those
points the average cost **must** be greater than the minimum. This is important
later when you are asked to approximate prices.
C. Shade in the appropriate profit (or loss) in diagram A, and calculate the total amount
of economic profit or loss each typical soybean producer will make under those
conditions. Fill in the blanks below to aid in your calculation.

Price (P) received by each Soybean producer $_____________

Quantity (Q) produced by each Soybean producer: _______ thousand Soybeans.

 Average total cost (ATC) for this quantity (approximate): $________ per Soybean.

Total revenue for each Soybean producer: $_____________

Total cost for each Soybean producer: $______________

Total profit for each Soybean producer: $______________

D. Based on your last answer, is the Soybean market in long-run equilibrium? Why or
why not?

E. What is the long run equilibrium price in this market? $________ per Soybean

How many Soybeans will each firm produce at this price? _________ thousand
Soybeans per week.

How many firms will be in the market at this price? __________