E202Exam2.13 - b Who would benefit from the program in the...

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8. Workers in a poor cotton-growing region choose between working in a factory at $6,000 a year or being a tenant cotton farmer. One farmer can work a 120 acre farm that rents for $10,000 a year. Such a farm yields $20,000 worth of cotton each year. The total nonlabor cost of producing the cotton is $4,000 a year. The local government decides to provide free fertilizer that would triple cotton yields. a. If the price of cotton is unaffected, how would this program affect the income of tenant farmers in the short run? In the long run? Answer : A cotton farmer would make a short-run economic profit of $60,000 revenue- $10,000 rent - $4,000 marketing cost - $6,000 opportunity cost, or $40,000/yr. In the long run, factory workers would want to move into cotton farming, and would thereby bid up the rent on cotton farms. The rent would continue to rise until it reached $50,000 per farm. At that point the incentive to leave a factory job would no longer exist, because cotton farmers would again be making zero economic profit.
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Unformatted text preview: b. Who would benefit from the program in the long run? How much would they gain each year? Answer : Landowners would reap the long-term benefits of the scheme. Their income would rise by $40,000/yr per 120-acre plot. 9. You have an opportunity to buy an apple orchard that produces $25,000 per year in total revenue. To run the orchard, you would have to give up your current job, which pays $10,000 per year. If you find both jobs equally satisfying, and the annual interest rate is 10 percent, what is the highest price you would be willing to pay for the orchard? Answer : Owning the orchard is owning a stream of $25,000 - $10,000 = $15,000 each year, net of the opportunity cost of your time. The highest you would be willing to pay for the orchard is the value that yields zero economic profit, the value which, invested in a bank at 10 percent interest, would also yield $15,000 a year. Since $150,000 (0.10) = $15,000, that amount is $150,000....
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