Let’s explore the business of Farmer Ted. The farmer has two fixed inputs that he owns: A tractor, which Ted can rent out for $24000 per year if he doesn’t use it on his farm at all in the year, and land which is currently valued at 1 million dollars. The only variable input is labor. The output of the farm per year depends on the quantity of labor hired per year in the following way:
L Q
1 10,000
2 25,000
3 45,000
4 63,000
5 78,000
6 90,000
7 100,000
8 106,000
9 108,000
10 107,000
a) Calculate the MP at each level of output and use this information to determine as best you can at what level of labor diminishing returns sets.
Ted is currently producing 100,000 bushels of output per year for which he receives a price of $2 per bushel. Ted pays $10,000 per worker per year. Currently Ted does no work on the farm. He instead works as a stockbroker earning $50,000 per year. Being a stockbroker, he is aware of opportunities that would allow him to invest his money safely and earn 10%.
b) Find the economic profit per year for Ted’s farm at current production levels. How will this number look different than the accounting profit described by Ted’s bookkeeper?
c) Ted is worrying that the farm is not as profitable as he would like. He is decides to do some of the farm work he is currently paying for. He would no longer have time to do his work as a stockbroker but would still be aware of the same investment opportunities. If Ted has the same farming skills as a person he hires and wants to keep the same level of production, show what would happen to his accounting and economic profit with this decision? Is this a good idea? Would it be a good idea if Ted was as productive as two workers?
d) Calculate the MC at q = 25,000, 45,000, 63,000, and 78,000. Explain why the answers here are consistent with the diminishing returns answer in part (a).