Solution 6 - FRE/ECON 374 LAND AND RESOURCE ECONOMICS...

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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
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This note was uploaded on 11/29/2010 for the course ECONOMICS 300-400 taught by Professor Varies during the Spring '10 term at Cornell University (Engineering School).

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Solution 6 - FRE/ECON 374 LAND AND RESOURCE ECONOMICS...

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