Solution Manual for Introduction to Agricultural Economics, 7th Edition

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Online Instructor’s Manualwith TestbankforIntroduction to AgriculturalEconomics7thEditionJohn B. Penson, Jr.Texas A&M UniversityOral Capps, Jr.Texas A&M UniversityC. Parr Rosson IIITexas A&M UniversityRichard T. WoodwardTexas A&M University

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Table of ContentsPart OneIntroductionChapter 1What is Agricultural Economics?1Chapter 2The U.S. Food and Fiber Industry4Part TwoUnderstanding Consumer BehaviorChapter 3Theory of Consumer Behavior8Chapter 4Consumer Equilibrium and Market Demand13Chapter 5Measurement and Interpretation of Elasticities17Part ThreeBusiness Behavior and Market EquilibriumChapter 6Introduction toProduction and Resource Use21Chapter 7Economics of Input and Product Substitution26Chapter 8Market Equilibrium and Product Price: Perfect Competition32Chapter 9Market Equilibrium and Product Price: Imperfect Competition36Part FourGovernment in the Food and Fiber IndustryChapter 10Natural Resources, the Environment, and Agriculture41Chapter 11Government Intervention in Agriculture46Part FiveMacroeconomics of AgricultureChapter 12Product Markets and National Output50Chapter 13Macroeconomic Policy Fundamentals55Chapter 14Consequences of Business Fluctuations61Chapter 15Macroeconomic Policy and Agriculture64Part SixInternational Agricultural TradeChapter 16Agricultural Trade and Exchange Rates68Chapter 17Why Nations Trade73Chapter 18Agricultural Trade Policy and Preferential Trading Arrangements76

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To the instructorThisbook is designed tocapture the relationships between the consumer and the firm and howthemarkets where they interact areaffected by macroeconomic policies and global trade.Anattempt is made to foster greater understanding of howa broad set of events taking place inmarkets and economies can bear on the decisions made byindividualconsumers and producers.The book flows from micro to markets and to macro concepts. But we attempt once arriving atmacroconceptstorelayhowmacropoliciescanaffectmarketsandindividualmarketparticipants.We initially define the field of economics and then developa definition of agriculturaleconomics based upon the broad role that agricultural economists play at the micro and macrolevels. Emphasis throughout the book is place on applicability of economics to decisions made inthe nation’s food and fiber industry.Part 2 helps the student understand the decisions made byindividual consumers and the market demand curve. Particular emphasis is placed on themeasurement and interpretation of elasticities.Part 3 focuses on decisions made by producersunder conditions of perfect and imperfect competition and the market supply curve. Part 4pertains to natural resources and the environment as well as the role of government in thenation’s food and fiber industry. Part 5 focuses on the macroeconomics of agricultureby initiallyaddressing measuring and understanding macroeconomic activity and policy.The effects ofspecific changes in macroeconomic policy are traced back toagricultureand their impact at theindividualproducerlevel.Finally,Part6focusesoninternationalagriculturaltrade,itsimportance to U.S. agriculture, and the measurement and applicability of foreign exchange ratesas they affect trade flows and market shares in a global agricultural framework.This book is accompanied by a set of chapter power point slide shows designed to emphasize keypoints covered in each chapter. A set ofquestions presentedin the“Testing Your EconomicQuotient”section at the end of each chapter helps underscore key concepts in the chapter.Theanswers to all of these questions are available in this instructor’s manual.

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SyllabiOur collective experience in teaching introductory courses in agricultural economics in a 16-week semestersettingsuggests all six sections of the book can be addressed with the choicebeing the level of emphasis placed on individual topics.An introduction to the field of agricultural economics can be taught in either a single semester ora two semester sequence where the first semester focuses on microeconomic topicsending withwelfare analysis and the second semester focuses on macroeconomics and trade.Our experience has been in a single semester setting which forces the instructor to pick andchoose the topics deemed essential for the beginning student.For example, Chapters 1 through 9dealing with the scope of the food and fiber industry through market equilibrium underconditions of perfect and imperfect competition provide an important foundation for additionalcourses in an agricultural economics curriculum. To allow for a complete treatment of themacroeconomic of agriculturecovered in Chapters 12 through 15, one can assume that naturalresource topics and sector-specific policy topics covered in Chapters 10 and 11 will be coveredin other courses in the curriculum. Finally, Chapter 16 dealing with agricultural trade andexchange rates is essential in today’s global economy. Chapters 17 and 18 dealing with whynations trade and trade agreements can be covered if time is available.Use of this book in a 10-week courseobviouslyrequires a narrower focus. One option would beto cover the essential microeconomic topics in Chapters 3 through 9, the measurement ofmacroeconomic activity (Chapter 12), the macroeconomics of agriculture (Chapter 15) andagricultural trade and exchange rates (Chapter 16).

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Chapter 1: What is Agricultural Economics?CHAPTER OVERVIEWThe purpose of this chapter was to define the field of agricultural economics as a subset of thegeneral field of economics. The major points made in this chapter may be summarized asfollows:1.Scarce resources are human and non-human resources that exist in a finite quantity. Scarceresources can be subdivided into three groups: (1) natural and biological resources, (2)human resources, and (3) manufactured resources.2.Resource scarcity forces both consumers and farmers to make choices.3.Most resources are best suited to be a particular use. Specialization of effort may lead to ahigher total output.4.The field of economics can be divided into microeconomics and macroeconomics.Microeconomics focuses on the actions of individuals--specifically the economic behaviorof consumers and farmers. Microeconomic analysis largely deals with the notion of partialequilibrium; events outside the market in question are assumed to be constant.Macroeconomics focuses on broad aggregates, including the nation's aggregate performanceas measured by gross domestic product (GDP), unemployment, and inflation.Macroeconomic analysis normally deals with the notion of general equilibrium; events in allmarkets are allowed to vary.5.Positive economic analysis focuses on what-is and what-would-happen-if questions andpolicy issues. Normative economic analysisfocuses on what-should-be or what-ought-to-bepolicy issues.6.Capitalism, or free market economics, socialism, and communism represent alternativeeconomic systems. The U.S. economy represents a mixed economic system. Some marketsare free to determine price, and other market prices are regulated.CHAPTER OBJECTIVES❑Define economics and agricultural economics.❑Distinguish between the fields of macroeconomics and microeconomics.❑Discuss the difference between positive and normative economic policy analysis.❑Identify the three measures of economic performance in the economy.❑Discuss the economist's role at the microeconomic and macroeconomic level.❑Understand the concept of marginal analysis.

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LECTURE OUTLINE❑Scope of EconomicsoScarce ResourcesoMaking Choices❑Definition of EconomicsoMicroeconomic versus MacroeconomicsoPositive versus Normative EconomicsoAlternative Economic Systems❑Definition of Agricultural Economics❑What Does an Agricultural Economist Do?oRole at Microeconomic LeveloRole at Macroeconomic Level❑SummaryThe coverage of the Chapter 1 power point slide show follows this lecture outline.While no major changes were made from the 6thedition, a number of photos of pioneers ineconomics and key leaders in agriculture today enhance the student’s interest.ANSWERS TO TESTING YOUR ECONOMIC QUOTIENT EXERCISESExercises appearing on page 11-12:1.a. Natural resourcesb. Human resourcesc. Manufactured resources2.a. Alternative 2 because this alternative provides the maximum profitb. $12 million, the profit associated with the next best alternative3.a. Normative economicsb. Positive economicsc. Macroeconomicsd. Microeconomics4.Change5.Mixed (d).6.Agricultural economics7.Fallacy of composition (b).8.The Belford family should grow cotton. In doing so, the net return per acre is $195 asopposed to $152.50 per acre for growing wheat and $160 per acre for leasing. The next bestalternative to the Belford family is leasing, As such, the opportunity cost to this family is anet return of $160 per acre. The total economic cost in arriving at this decision is the $285per acre of production expenses in growing cotton plus the opportunity cost of $160 peracre. Hence, the total economic cost is $445 per acre.9.Specialization10.111.Adam Smith

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12.Thomas Piketty

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Chapter 2: The U.S. Food and Fiber IndustryCHAPTER OVERVIEWThe purpose of this chapter was to acquaint the student with the structure and performance of thefarm sector during the post-World War II period and its role in the nation's food and fiberindustry. The major points made in this chapter may be summarized as follows:1.The U.S. food and fiber industry consists of different groups of business entities calledsectors, which are in one way or another associated with the supply of food and fiberproducts to consumers. In addition to the farm sector, this industry consists of firms thatsupply manufactured inputs to farms and ranches, firms that process raw food and fiberproducts, and firms that distribute food and fiber products to consumers.2.Among the physical structural changes taking place in the farm sector during the post-WorldWar II period is the trend toward fewer but larger farms. We have also seen a tremendousexpansion in the use of manufactured inputs, such as machinery and chemicals, and a declinein labor use. Rising capital requirements in general during the period have increasinglyrepresented a potential barrier to entry for would-be farmers.3.Although the total quantity of inputs used in producing raw agricultural products hasremained relatively stable during the post-World War II period, the total quantity of outputhas increased substantially. These results, taken together, imply an increase in productivity,or the ratio of output to inputs.4.Gross farm income has increased, albeit somewhat erratically, during the post-World War IIperiod, while production expenses have behaved in similar fashion. The result is a highlyvariable level of profits, or profitability, from one year to the next.5.The financial structure of the farm sector during the post-World War II period shows thatfinancial assets represent a considerably smaller portion of total farm assets. Real estateassets are the major component of farm asset..6.The U.S. food marketing sector is the network of processors, wholesalers, retailers, andrestaurateurs that market food from farmers to consumers. Approximately 83% of thepersonal consumption expenditures on food went to pay for activities taking place beyond thefarm gate.7.Along the flow of products from farmers to processors and eventually on to consumers,middlemen play a vital role. Classifications of middlemen firms include merchantmiddlemen firms, agent middlemen firms, speculative middlemen firms, processing andmanufacturing firms, and facilitative organizations.

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8.In recent times, the number of mergers and acquisitions in food industries has increasedsharply relative to historical levels. Consequently, food industries have become moreconcentrated. Concentration is particularly high in industries marketing products such asbreakfast cereals, beer, candy, and soft drinks.9.The food processing industry and the wholesale and retail trade industries are characterizedby a relatively small number of firms that account for a substantial portion of total industrysales. Although aggregate concentration has increased, the number of food marketingcompanies has remained relatively constant.10.Farmers and ranchers get approximately 17% of the dollar spent on food. This share variesconsiderably by commodity. The remaining portion goes to food processors, wholesalers,and retailers. The major categories of expenditures include labor, packaging, transportation,and advertising.11.The transportation of food and fiber products along the marketing chain is an extremelyimportant component. The storing and exporting of nonperishable commodities is also animportant dimension of the marketing of agricultural commodities.CHAPTER OBJECTIVES❑Visualize the scope of the U.S. food and fiber industry.❑Understand the changing structure of farming.❑Define productivity and understand post-WW II trends.❑Discuss trends in real net farm income and equity of farmers.❑Understand the role played by other firms in the food and fiber system.❑Understand the notion of how economists report measures of economic activity.❑Understand how to calculate and interpret output and price indices❑Understand the difference between real and nominal measures of economic activity.LECTURE OUTLINE❑Measuring and Interpreting Indices❑What is the Food and Fiber Industry❑Changing Complexion of FarmingoPhysical StructureoSpecialization, Diversification, Organization and ContractingoProductivityoProfitabilityoFinancial Structure❑Other Sectors in the Food and Fiber IndustryoFarm Input SuppliersoFood Processors, Wholesalers, and RetailersoValue-Added ProcessoFiber Manufacturers

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oShippers and HandlersoImportance of Export Markets❑SummaryThe coverage of the Chapter 2 power point slide show follows this lecture outline. While nomajor changes were made from the 6thedition, selectedcharts and figures have been updatedwhere appropriate with information available at the time of publication. Minor changes weremade to the questions at the end of the chapter.ANSWERS TO TESTING YOUR ECONOMIC QUOTIENT EXERCISESExercises appearing on page38-40:1.c, between 10 and 15.2.$14 million, net worth=assets-liabilities3.marketing bill4.b5.d6.(a) farm input suppliers; (b) farmers; (c) food processors and manufacturers; (d) foodwholesalers, retailers, and food service purveyors; (e) consumers7.Labor8.209.$30,00010.0.9; 1.25; 111.a, b, c12.213.(a) $350,000; (b) $8 million14.(a) 0.9333; (b) 0.9655; (c) 201015.$60,00016.see Table 2-117.see Table 2-218.inflation19.a20.d21.c

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Chapter 3: Theory of Consumer BehaviorCHAPTER OVERVIEWThe major points made in the chapter may be summarized as follows:1.The budget constraint represents the amount of income the consumer has to commit toconsumption in the current period. A proportional change in all prices and income hasnoeffecton the budget constraint. For this reason, economists argue that only relative pricechanges matter. When presented graphically, the budget constraint is frequently referredto as the budget line, which tells us the rate of exchange between two goods as theirprices change, is given by the negative of the price ratio. A change in relative prices willchange the slope of the budget line. Finally, an increase (decrease) in income will shiftthe budget line to the right (left). Changes in income do not affect the slope of the budgetline.2.We assume that consumers are rational and maximize their satisfaction, or utility. Thus,consumers are assumed to be able to rank all their choices.3.Early researchers of consumer behavior argued that utility could be measured. The termutilswas used as a unit of measure. A hamburger might yield 10 utils, a soda 4 utils, andso on. Marginal utility describes the change in utility or utils as more of a good isconsumed and is thought to diminish as consumption increases. This phenomenon isknown as the law of diminishing marginal utility.4.Today no one really believes that utility can be measured in utils. Instead, utility isthought of in the context of a personal index of satisfaction. The magnitude of this index(or function) serves to order the consumption bundles, or combinations of goods theconsumer faces.5.All consumption points that provide the same utility form an iso-utility, or indifferencecurve. Increases (decreases) in utility are indicated by a shift in an indifference curve tothe right (left). The negative of the slope of this curve is known as the marginal rate ofsubstitution (MRS). This rate indicates the willingness of the consumer to substitute onegood for another. The decline in the willingness of the consumer to substitute one goodfor another as one moves down an indifference curve indicates the existence of theprinciple of diminishing marginal utility.CHAPTER OBJECTIVES❑Understand the concept of total utility.❑Understand the concept of marginal utility.

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❑Be able to apply the Law of Diminishing Marginal Utility.❑Define an indifference curve and apply the Law of Diminishing Marginal Utility toIndifference curve analysis.❑Explain what an indifference curve map is and determine which indifference curves on amap represent more or less total utility.❑Compare and contrast the assumptions regarding the analysis of total utility received bythe consumer.❑Address both the marginal utility and indifference curve approaches to consumerbehavior.❑Define the budget constraint and be able to discuss the two factors that determine itsposition and slope.❑State and address Engel’s Law.LECTURE OUTLINE❑Utility TheoryoTotal UtilityoMarginal UtilityoLaw of Diminishing Marginal Utility❑Indifference CurvesoConcept of IsoutilityoMarginal Rate of Substitution❑The Budget Constraint❑SummaryThe coverage of the Chapter 3 power point slide show follows this lecture outline. While nomajor changes were made from the 6thedition, selectedcharts and figures have been updatedwhere appropriate with information available at the time of publication. Minor changes weremade to the questions at the end of the chapter.ANSWERS TO TESTING YOUR ECONOMIC QUOTIENT EXERCISESExercises appearing on pages 51-55:1.# wingstotal utilitymarginal utilitya.130--b.25828c.38426d.615022e.1222212f.243067The slope is negative because of the law of diminishing marginal utility.

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2.a.Choose 12 bottles of suds and 3 wings.Higher total utilityb.Choose 12 bottles of suds and 6 wings.c.The marginal rate of substitution between A and E is–1. The marginal rate ofsubstitution between B and C is-0.5.a.The budget line would be 24 wings and 8 bottles of Coca-Colab.The budget line would be 24 wings and 12 bottles of Coca-Colac.The budget line would be 4 wings and 8 bottles of Coca-Colad.The budget line would be 80 wings and almost 27 bottles of Coca-Colae.Cannot say without accounting for utility of consumption of wings and Coca-Cola3.a.-1.25b.Willing to give up 1.25 tacos to get one more hamburgeri = 7 tacos and 1 hamburger gives 100 utilsii = 2 tacos and 5 hamburgers gives 100 utilsiii = 5 tacos and 7 hamburgers gives 300 utilsiv = 7 tacos and 5 hamburgers gives 300 uitls4.1stgraph = price of hamburgers doubled2ndgraph = income fell in half or the price of both products doubled3rdgraph = price of tacos fell in half5.5080AB2030EnvironmentalqualityCheapfood

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a.Indifference curveb.MRS=-3.0. So, you are willing to give up 3 units of cheap food to get one moreunit of environmental quality6.7.(a) 5; (b) 38.a, The price of steak rose.9.$2.50 per pound10.Utility11.law of diminishing marginal utility12.(a) 2; (b) marginal rate of substitution13.indifference curve or iso-utility curve14.(a) budget line; (b) price of beef changed15.a. Extreme points—buy only movies (10); buy only video games (25)Place movies on the y-axis and video games on the x-axis. The coordinates are (0,10) and(25,0). Draw a straight line through these points. The slope of the budget line is-0.4. NowBiscuits10660(b)(a)Tea

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place movies on the x-axis and video games on the y-axis. The coordinates are (10,0) and(0,25) respectfully. The slope of this budget line is-2.5.16.b17.B, most preferred; A, least preferred18.Zero19.Ordinal20.Utility21.Indifference22.(a) True; (b) False; (c) True; (d) False23.a

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Chapter 4: Consumer Equilibrium and Market DemandCHAPTER OVERVIEWThe major points made in the chapter can be summarized as follows:1.Factors affecting consumer demand are:oprice of the productoprice of other productsodisposable income of consumers andotastes and preferences2.The consumer is at equilibrium when the marginal rate of substitution or slope of thehighest attainable indifference curve is equal to the slope of the budget line, oralternatively, when an additional dollar spent on each good would return the samemarginal utility per dollar.3.Each tangency point between the budget line and indifference curve when price changesleads to a new consumer equilibrium. The locus of all such tangencies is called the price-consumption curve.4.A demand curve is a schedule that shows,ceteris paribus, how many units of a good theconsumer is willing and able to buy at different prices for that good during somespecified time in a specified market.5.Movement along a demand curve when the price of the good changes is referred to as achange in the quantity demanded; a shift in the demand curve resulting from a change inprices of other goods, income, population and/or tastes and preferences is referred to as achange in demand.6.The market demand for a good is equal to the sum of all individual demands for the good.Individual demand curves for a product are added horizontally at each price to obtain themarket demand curve for a product. As a general law, demand curves are presumed tohave a negative slope, reflecting the inverse relationship of prices and quantitiesdemanded.7.Changes in tastes and preferences refer to changes in composition of the population,attitudes toward nutrition and health, and attitudes toward food safety, lifestyles,technological forces, and advertising.CHAPTER OBJECTIVES

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❑Explain the concept of consumer equilibrium.❑Demonstrate how changes in prices or income affect consumer equilibrium.❑Derive a consumer's demand curve.❑Know the difference between a change in demand and a change in quantity demanded.❑Demonstrate how a change in consumer disposable income, a change in the price of arelated good, or a change in tastes and preferences affects consumer demand.❑Identify the various components of consumer tastes and preferences that affect thedemand for goods and services produced in the food and fiber system.❑Derive a market demand curve.❑Define consumer surplus and explain its usefulness to economic policy makers.LECTURE OUTLINE❑Conditions of Consumer Equilibrium❑Changes in EquilibriumoChanges in Product PriceoChanges in Other Demand Determinants❑The Law of DemandoMarket DemandoInterpretation of Market Demand❑Tastes and PreferencesoComposition of the PopulationoAttitudes Toward Nutrition and HealthoFood SafetyoLifestylesoTechnological ForcesoAdvertising and Promotion❑Consumer Surplus❑SummaryThe coverage of the Chapter 4 power point slide show follows this lecture outline. While nomajor changes were made from the 6thedition, selectedcharts and figures have been updatedwhere appropriate with information available at the time of publication. Minor changes weremade to the questions at the end of the chapter.ANSWERS TO TESTING YOUR ECONOMIC QUOTIENT EXERCISESExercises appearing on pages 69-73:1.Betty at point A= 30 shirts, 5 pair, $15.00, $30.00Betty at point B = 10 shirts, 10 pair, $30.00, $30.00Wilma at point C = 60 shirts, 10 pair, $15 .00, $30.00Wilma at point D = 20 shirts, 20 pair, $30.00, $30.00

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2.(a) $4 per pound; (b) $3 per pound; (c) 6 pounds of steak and 8 pounds of chicken werebought; this combination of steak and chicken maximizes utility given the budgetconstraint of $48. The consumer is in equilibrium at point A.3.(a) Price on the y-axis and quantity on the x-axis. Draw a downward sloping line.(b) a perfectly inelastic demand curve(c) a perfectly elastic demand curve4.The following table gives points on the Engel curve:At point PS1, quantity A = 7.5, quantity B = 5 and income = $22.50At point PS2, quantity A = 19.5, quantity B = 7 and income = $45.00At point PS3, quantity A = 18.0, quantity B = 18.0 and income = $67.50Product A is a normal good from point PS1 to point PS2, but an inferior good from pointPS2 to point PS3. Product B is a normal good from point PS1 to point PS2 and from pointPS2 to point PS3.5.(a) Consumer surplus is area ABD(b) Consumers are better off with area ACE over ABD, or by the change in area BDCE(c) $3 million(d) $9 million6.(a) The demand curve shifts to the left(b) Change in demand7.(a) Engel curve; (b) normal good8.equilibrium9.a, b, dBettyWilmaMarket3015103020603090Qt-shirtsPt-shirts

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10.b11.d12.b13.ceteris paribus14.b15.c, the demand curve shifts to the left16.d17.b18.b19.d

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Chapter 5: Measurement and Interpretation of ElasticitiesCHAPTER OVERVIEWThe major points made in the chapter may be summarized as follows:1.The own price elasticity of demand measures the percentage change in the quantitydemanded for a good, given a 1% change in price. If this elasticity is greater than one,demand is said to be elastic (i.e., the percentage change in quantity exceeds thepercentage change in price). If this elasticity is less than one, demand is said to beinelastic (i.e., percentage changes in quantity are smaller than percentage changes inprice). If this elasticity is equal to one, demand is said to be unitary elastic (i.e.,percentage changes in quantity are equal to percentage changes in price).2.The income elasticity of demand measures the percentage change in the quantitydemanded for a good, given a 1% change in income. When the income elasticity ofdemand is between zero and one, the good is classified as a necessity; when this elasticityexceeds one, the good is classified as a luxury good. Both luxury goods and necessitiesare normal goods.When the income elasticity of demand is negative, the good isclassified as an inferior good.3.If demand is inelastic, a rise (reduction) in price will lead to increased (decreased)consumer expenditures. If demand is elastic, a rise (reduction) in price will lead to areduction (increase) in consumer expenditures. Finally, if demand is unitary elastic,expenditures are unchanged as price changes.4.Cross-price elasticity measures the change in the demand for one good in light of a 1% change in the priceof another good. If this elasticity is positive (negative), the two goods are said to be substitutes(complements). If this elasticity is equal to zero, the two goods are independent in demand.5.Determinants of the elasticity of demand of a commodity include availability ofsubstitutes for the commodity, alternative uses for the commodity, type of market (e.g.farm level versus retail level or domestic market versus export market), percentage of thebudget spent on the commodity, and time.CHAPTER OBJECTIVES❑Define, derive, and interpret an own-price elasticity of demand coefficient.❑Define, derive, and interpret an income elasticity of demand coefficient.❑Define, derive, and interpret a cross-price elasticity of demand coefficient.❑Discuss the factors influencing these three types of elasticity.❑Understand the differences between these elasticities between the short run and the longrun.

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❑Discuss the implications of an inelastic demand versus an elastic demand at all levels ofthe food and fiber system.LECTURE OUTLINE❑Own Price Elasticity of Demand❑Income Elasticity of Demand❑Cross Price Elasticity of Demand❑Other General PropertiesoReal World Examples of Elasticities❑Applicability of Demand ElasticitiesoApplicability to PolicymakersoApplicability to FarmersoApplicability to ConsumersoApplicability to Input ManufacturersoApplicability to Food Processors and Trade Firms❑SummaryThe coverage of the Chapter 5 power point slide show follows this lecture outline. While nomajor changes were made from the 6thedition, selectedcharts and figures have been updatedwhere appropriate with information available at the time of publication. Minor changes weremade to the questions at the end of the chapter.ANSWERS TO TESTING YOUR ECONOMIC QUOTIENT EXERCISESExercises appearing on pages 87-89:1.Demand curve shifts to the right as a result of successful advertising. Other determinantsinclude (1) the price of Big Macs, (2) the price of substitutes and complements such asBurger King hamburgers and french fries, and (3) income.2.a.Complementsb.PpancakesQpancakesBAPsyrupQsyrup

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c.The cross price elasticity is negative for pancakes and syrup.3.Between A and B, the own price elasticity is elastic (-1.38). Between B and C, the ownprice elasticity if inelastic (-0.46). Between A and B, recommend a price decrease.Between B and C, recommend price increase to raise total revenue.4.The elasticity is–1.3. The price of $7.70 represents a 20 percent increase from the initialprice of $7.00. Therefore, the percentage change in quantity must be–13%. If 3,000burger platters currently are sold at $7.00, a 20 percent increase in price is associated with2,610 platters sold.5.The income elasticity between points A and B is 1.80. The income elasticity betweenpoints B and C is–1.57. Therefore the good is a normal good (actually a luxury item sinceits income elasticity exceeds one) between A and B, and the good is an inferior goodbetween B and C.6.Hamburger consumption will fall by 3 percent. Hamburger and hamburger buns arecomplements since the cross-price elasticity of demand is negative.7.Sales of Pepsi will rise by 4 percent. Thus, this retailer will sell 1.040 six packs of Pepsiper day as a result of the price of Coca-Cola increasing by 5 percent, assuming all otherfactors are invariant. Pepsi and Coca-Cola are substitutes because of the positive cross-price elasticity of demand of 0.4.8.-2/3=-0.6679.Alfred Marshall10.b11.d12.b13.c14.b15.b16.-0.417.(a) substitutes; (b) necessity (also a normal good)

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18.c19.The price of $3.00 represents a 20 percent increase from the initial price of $2.50.Therefore, the percentage change in quantity must be 12%.20.-1.2521.Note that by definition, the own-price elasticity of demand is equal to the % change inquantity demanded divided by the % change in price. So to determine the % change inprice, take the ratio of the % change in quantity demanded and divide by the own-priceelasticity of demand. In this case that ratio is equal to 1/-.34=-2.94. Hence a 1% increase inquantity coming onto the market would depress farm prices by 2.94 % or almost 3%.22.Note that by definition, the own-price elasticity of demand is equal to the % change inquantity demanded divided by the % change in price. So to determine the % change inprice, take the ratio of the % change in quantity demanded and divide by the own-priceelasticity of demand. In this case that ratio is equal to-10/-.2015= 49.63. Hence a 10%decrease in quantity of apples coming onto the market due to a freeze would increase theprice of apples by 49.63 % or nearly 50%.23.b

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Chapter 6: Introduction to Production and Resource UseCHAPTER OVERVIEWThe purpose of this chapter was to illustrate the various physical relationships that exist betweeninputs and outputs and the economics of short run production decisions. The major points of thischapter can be summarized as follows:1.Farm inputs can be classified into land, labor, capital, and management. Aproductionfunctioncaptures the causal physical relationship between these inputs and the level ofoutput.3.Thetotal physical productreflects the level of output of a given level of input use.Marginal physical productrepresents the change in the level of output associated with achange in the use of a particular input. Finally,average physical productreflects thelevel of output per unit of input use. In each case, all other inputs are held fixed. Thevalue of the marginal physical product represents the slope of the total physical productcurve. No rational farmer would want to produce beyond the point at which the marginalphysical product equals zero, because further input use would cause the level of output tofall.4.There are threestages of production:stage Iis the point at which the marginal physicalproduct curve for a particular input is rising but still lies above the average physicalproduct curve,stage IIis the point at which the marginal physical product equals theaverage physical product and continues until the marginal physical product for the inputin question reaches zero, andstage IIIis the point at which stage II left off, or where thetotal physical product curve begins to decline and the marginal physical product curvebecomes negative.5.Thelaw of diminishing marginal returnsstates that as the use of an input increases, itsmarginal physical product will eventually fall.6.Marginal costis the change in total cost with respect to a change in output.Average costis total cost divided by total output.Fixed costsare those costs that do not vary withoutput.7.The profit maximizing level of outputoccurs in the short run where marginal cost equalsmarginal revenue. The perfectly competitive business takes the market price (MR) asgiven by the market place and makes its production decisions by equating MC = MR.8.The profit maximizing level of input useoccurs in the short run at the input level atwhich MVP = MIC. The competitive business takes the per unit price of the variable

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input (MIC) as given by the market place and makes it purchasing decisions by equatingMVP = MIC.9.The business willbreak evenin the short run at the output level if the price the businessreceives for its product falls to the point at which average revenue (AR) equals averagetotal cost (ATC), or where average profit per unit of output is zero. The business maycontinue to operate in the short run if AR < ATC, because it can minimize its losses (i.e.,cover at least some of its fixed costs).10.The business will cease operations, orshut down,in the short run if the price the businessreceives for its product falls to the point at which average revenue is less than averagevariable cost (AR < AVC). When this occurs, the business will no longer be able tocover its variable costs (e.g., pay its fuel bill) and will be unable to acquire additionalinputs.CHAPTER OBJECTIVES❑Understand the conditions necessary for perfect competition.❑Discuss the inputs necessary for the production of a product.❑Understand, graphically depict, and mathematically derive the main productionrelationships between inputs and outputs including total physical product, averagephysical product, marginal physical product, and the stages of production.❑Understand, graphically depict, and mathematically derive the short-run production costssuch as total cost, average total cost, average variable cost, marginal cost, and marginalinput cost.❑Understand the relationship between the short-run production cost curves and the shortrun physical product curves.❑Understand, graphically depict, and mathematically derive the important revenuerelationships such as total revenue, average revenue, marginal revenue, and marginalvalue product.❑Be able to determine the profit-maximizing level of output and the profit-maximizinglevel of input use and their relationship to one another.LECTURE OUTLINE❑Conditions of perfect competition❑Classification of inputsoLandoLaboroCapitaloManagement❑Important production relationshipsoThe Production Function

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