Fall '07 Hourly 2

# Fall '07 Hourly 2 - TUFTS UNIVERSITY Department of...

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TUFTS UNIVERSITY Department of Economics Hourly Exam #2 Economics 16 Quantitative Intermediate Theory, Micro Professor Linda Datcher Loury Fall 2007 Read each question carefully. Answer both questions. 1) Farms 1-4 all have long term contracts to produce 10,000 seedlings per month for Home Depot. All four farms initially used 100 units of conventional fertilizer and 50 units of ecologically safe (or green) fertilizer to grow the seedlings. This was the least cost choice for all farms. Each unit of green fertilizer costs \$200 and each unit of conventional fertilizer costs \$40. The total cost of growing the seedlings was initially \$14,000 per month. Now suppose that, because many more farmers have become concerned about the environment, the price of green fertilizer rose to \$250 per unit. a) At farm 1, the price of each unit of conventional fertilizer increased to \$50 at the same time that the cost of green fertilizer rose. Because the price of green fertilizer increased by \$50 and the price of conventional fertilizer increased by \$10, the manager at farm 1 believes that she can keep total costs from rising by reducing the amount of green fertilizer and increasing the amount of conventional fertilizer used to produce the 10,000 seedlings. Should the manager at farm 1 increase the amount of green fertilizer, reduce the amount of green fertilizer, keep the same amount of green fertilizer, or does it depend? By how much do total costs change? Be as specific as you can. Explain your answers thoroughly. b) At farms 2 and 3, the price of each unit of conventional fertilizer increased to \$80 at the same time that the cost of green fertilizer rose. After the change in the prices of conventional and green fertilizer, farm 3 used less green fertilizer than farm 2.

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