FRE/ECON 374 LAND AND RESOURCE ECONOMICS
Problem Set 6 – Answer Guide – Each Question Worth Potential 10 Points
1.
Karine is a landowner in Quebec.
She owns two fields and grazes cows on both.
Field 1 has
a natural pond; in Field 2 Karine must pump in water.
The total cost of producing tankers of
milk (q) in each field is represented by:
TC
1
= 20 + 5q
2
and TC
2
= 50 + 5q
2
.
The price of
milk is set at p = 40.
a)
Write down the formulas for average and marginal cost in each field.
Plot AC
1
and MC
1
on one diagram and AC
2
and MC
2
on another.
AC
1
= 20/q + 5q
MC
1
= 10q
AC
2
= 50/q + 5q
MC
2
= 10q
b)
Calculate, and show on your diagrams, the quantity Karine will produce in each field.
Profit is maximized at p = MC in each field, 40 = 10q, and find q
1
= q
2
= 4.
c)
Calculate, and show on your diagrams, the Ricardian rent Karine gets from each field.
Ricardian rent is p – AC at the quantity produced multiplied by quantity produced; the shaded
areas in the diagrams.
In Field 1 = (40 – 25) x 4 = 60.
In Field 2 = (40 – 32.5) x 4 = 30.
p
q
40
4
32.5
3.16
AC
2
0
NB.
Not
to scale
MC
2
p
q
40
4
25
2
AC
1
0
NB.
Not
to scale
MC
1
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2.
Matt lives in Saskatchewan and grows crops.
He can choose to grow wheat or canola.
Demand for the crops is represented by: p
w
= 100 – 10q
w
and
p
c
= 100 – 10q
c
.
Canola
grows well in all types of weather but wheat does poorly in years of drought and a drought
occurs 50% of the time.
Matt has to decide what to plant before he knows whether there
will be a drought or not.
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 Spring '10
 varies
 Economics, Microeconomics, Supply And Demand, Harshad number

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