INTRO TO AG ECON
INTRO TO AG ECON ARE 012
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This 39 page Class Notes was uploaded by Norbert Terry on Thursday October 15, 2015. The Class Notes belongs to ARE 012 at North Carolina State University taught by Herman Sampson in Fall. Since its upload, it has received 8 views. For similar materials see /class/223760/are-012-north-carolina-state-university in Agricultural & Resource Econ at North Carolina State University.
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Date Created: 10/15/15
Marginal Analysis A Key to Economic Analysis gimzl Analysis Marginal analysis is used to assist people in allocating their scarce resources to maximize the benefit of the output produced Simply getting the most value for the resources used gimzl Analysis Marginal analysis The analysis of the benefits and costs of the marginal unit of a good or input Marginal the next unit gimzl Analysis A technique widely used in business decisionmaking and ties together much of economic thought In any situation people want to maximize net benefits Net Benefits Total Benefits Total Costs Control Variable To do marginal analysis we can change a variable such as the ozo quantity of a good you buy oz the quantity of output you produce or ozo the quantity of an input you use This variable is called the control variable 5 Control Variable Marginal analysis focuses upon whether the control variable should be increased by one more unit or not Key Procedure for Using Marginal Analysis 1 Identify the control variable CV 2 Determine what the increase in total benefits would be if one more unit of the control variable were added This is the marginal benefit of the added unit Key Procedure for Using Marginal Analysis 3 Determine what the increase in total cost would be if one more unit of the control variable were added This is the marginal cost of the added unit Key Procedure for Using Marginal Analysis 4 If the unit39s marginal benefit exceeds or equals its marginal cost it should be added Key Procedure for Using Marginal Analysis Remember to look only at the changes in total benefits and total costs If a particular cost or benefit does not change IGNORE IT 10 Does This Work Because Marginal Benefit Increase in Total Benefits per unit of control variable ATRA Qw MR where cv control variable 11 Does This Work Marginal Cost Increase in Total Costs per unit of control variable ATCAQcv MC 12 Does This Work So Change in Net Benefits Marginal Benefit Marginal Cost 13 Does This Work When marginal benefits exceed marginal cost net benefits go up So the marginal unit of the control variable should be added 14 mple Should afirm produce more A firm39s net benefit of being in business is PROFIT The following equation calculates profit PROFIT TOTAL REVENUE TOTAL COST 15 mple Should afirm produce more Where TR Poutput X Qoutput TC 2 Pinputi X Qinputi i1 Assume the firm39s control variable is the output it produces 16 lem International Widget is producing fifty widgets at a total cost of 50000 and is selling them for 1200 each for a total revenue of 60000 If it produces a fiftyfirst widget its total revenue will be 61200 and its total cost will be 51500 17 lem Should the firm produce the fiftyfirst widget 18 The fiftyfirst widget39s marginal benefit is 1200 61200 60000 1 This is the change in total revenue from producing one additional widget and is called marginal revenue 19 The firm39s marginal cost is 1500 51500 50000 1 This is the change in total cost from producing one additional widget This extra widget should NOT be produced because it does not add to profit 20 Change in Net Revenue Benefit Marginal Revenue Marginal Cost 300 1200 1500 21 Ach Qwidgets TR ATR TC ATC 50 6000 50000 1 lt 1200 gt 1500 51 61200 51500 MR ATR A QCV 1200 1 1200 MC A TC A QCV 1500 1 1500 22 What is the minimum price consumers would have to pay to get a 51st Widget produced ozo Consumers would have to pay at least 1500 for the extra widget to get the producer to increase production 23 mary ozo Marginal analysis forms the basis of economic reasoning ozo To aid in decisionmaking marginal analysis looks at the effects of a small change in the control variable 24 mary ozo Each small change produces some good its marginal benefit and some bad its marginal cost ozo As long as there is more quotgoodquot than quotbadquot the control variable should be increased since net benefits will then be increased 25 tical Exercise Turn to the class exercise in your Notebooks Please complete the class exercise 26 Name Day and Time of Lab E zUATIONS YOU MAY NEED FOR THIS EXAM Depreciation Purchase price salvage value years of useful life Average Value or Average Value of Investment Purchase price salvage value 2 Slope change in Y change in X or change in P change in Q or RISE RUN Percent change To From From 100 Percent change in Qd QI Q0 Q0 100 Percent change in P P1 Po P0 100 Marginal revenue change in total revenue change in Quantity of control variable Marginal cost change in total cost change in Quantity of control variable Physical Ef ciency Units of Output Units of Input Economic Ef ciency Value of Output Value of Input Units of Output Price of Output Units of Input Price of Input PE Price of Output Price of Input Change in Economic Ef ciency Change in the value of output Change in the value of input Average Relative Price in 198284 dollars Nominal Price CPI X 100 Where i year EXPLANATION OF TERMINOLOGY USED Graph accurately scaled precisely plotted accurately drawn to scale and labeled Rough sketch or illustrate not scaled or precisely plotted but completely labeled What explain means on one of my exams Webster s Collegiate Dictionary de nes EXPLAIN as l to make plain or understandable 2 to give the reason of or cause of 3 to show the logical development or relationships of Webster s continues by enhancing the de nition with the following statement quotExplain implies a making plain or intelligible what is not immediately obvious or entirely known SHOW ALL YOUR WORK IN A NEAT AND ORGANIZED MANNER Exam 2 ARE 012 Fall 1998 Answer the questions below to the best of your ability Answer the questions on the test sheet Answer all parts of each numbered question You must show all work to receive full credit for your answers to numerical problems The price associated with all parts of each question input is provided so that you may make an informed management decision regarding the production of this exam output Be thorough and complete in ALL your responses Please read and sign the Honor Pledge on the test sheet below or your exam will not be graded I have neither given or received unauthorized aid on this exam Student Name print please Student s Signature Circle the best correct response for each multiple choice question below Each multiple choice question has an opportunity cost of 2 points 1 What were the KEY words in the de nition of economics as presented in class a demand and supply b normative and positive c pro t and losses d choices scarcity and time e none of the above 2 Goods are scarce because a they are imported from other countries b they sometimes have to be ordered c a person can never acquire quotenoughquot goods and services at a price equal to zero d it takes time to produce goods e none of the above 3 One of the functions of an economic system is to Provide for the Maintenance and Growth of the System An example of this function is as follows a AntiTrust laws to prevent monopolies from taking advantage of consumers b using prices to ration consumption c assembling the factors of production to produce a good or service d a government tax break on capital investments e none of the above 4 Consumer sovereignty refers to the following function of an economic system a determining what commodities to produce and how much to produce b organizing the production process c providing for the maintenance and growth of the system d distributing resources commodities and proceeds from production e none of the above 5 Let s suppose that you have a job that pays 30000 per year in your hometown of Spivey39s Comer North Carolina You are offered a job in Denver Colorado that pays 45000 What is your opportunity cost of working in Spivey s Comer a 45000 b 15000 c 30000 d 5000 e insufficient information to work problem 6 In the table below you see a list of inputs in the lefthand column Fill in the factor of production category that is associated with the input in the column labeled quotFactor of Productionquot Fill in the name of the payment that the factor of production receives in the column labeled quotPayment Receivedquot 10 points Input Factor of Payment Received Production Boxend wrench Hydraulic Jack 2ton Copper Computer A 12 point 26 inch inside spread buck deer Innovative ability Physical work Education Farm Truck Walk Behind Mower 7 Jeff Buckshot s gross income in 1997 was 25000 His wife Ellen grossed 45000 in 1997 Jeff and Ellen have three children ages 2 4 and 6 years of age The standard deduction for a married couple jointly ling a 1997 Federal Tax Return is 6900 Jeff and Ellen have itemized deductions that total 15000 The personal and dependent exemption is 2650 each The combined Social Security and Medicare tax rate is 765 The tax on Jeff and Ellen39s personal property that is paid to their county government and local municipality totals 1200 Jeff and Ellen purchased 1500 gallons of gas for their vehicles in 1997 The combined federal and state excise tax rate on gasoline in North Carolina is 404 per gallon Jeff and Ellen paid 2850 in state and county sales taxes in 1997 Jeff and Ellen currently save approximately 6 of their takehome pay They spend about 45 of their gross income on family living expenses mortgage payment food clothing car payments utilities a Calculate Jeff and Ellen39s taxable income for 1997 5 points b Calculate Jeff and Ellen39s disposable income for 1997 5 points c Calculate Jeff and Ellen39s discretionary income for 1997 5 points 8 List the functions of an economic system that must be performed 5 points 9 You own a landscape maintenance business with ve maintenance crews serving a segment of the North Raleigh residential market Over the last ve years you have calculated that the wage rate you must pay to hold on to your current labor force has increased 25 You are having dif culty passing this higher labor cost on to your customers because of stiff competition in the area The CPI indeX 198284 100 in 1992 was 1419 The CPI indeX at the end of September 1998 was 1636 Calculate the in ation rate and determine what has happened to the real price of labor 5 points a As a pro tmaximizing manager discuss what you would investigate or consider to reduce your labor cost increase pro ts and maintain customer service at current levels 5 points 10 Let s suppose a friend of yours manufactures and sells climbing deer stands Your friend has asked you to help him sell his deer stands at the Dixie Deer Classic in Raleigh The Deer Classic will run from 500 pm to 900 pm Friday 900 am to 900 pm on Saturday and 900 am to 500 pm on Sunday You would get a 1 hour break on Saturday and Sunday Assume your current wage rate is 2000 per hour You value your free time during this period of the year at 60 of your wage rate Your friend will compensate you for all your direct costs e g transportation In return for your time your friend has offered you two free deer stands valued at 225 each a What is the value of your free time that you give up by working at the Deer Classic 2 points b Will you help your friend at the Deer Classic Explain your answer 8 points 11 In 1973 I was 16 years old and the price of a gallon of regular gasoline was 48 In September 1998 I could purchase a gallon of regular gasoline for 90 The CPI indeX 198284 in 1973 was 444 and in September of 1998 it was 1636 SHOW ALL OF YOUR WORK a First calculate the percentage change in the CPI indeX from 1973 to September 1998 Then calculate the percentage change in the nominal price of gasoline from 1973 to September 1998 What has happened to the quotrealquot price of gasoline since 1973 2 points b In 1973 I regularly worked for 75 per hour cash off the books How many hours did I have to work to buy one gallon of gasoline at the nominal price 48 per gallon 2 points c Assume you can earn 600 per hour cash off the books today How many hours must you work to buy a gallon of gasoline at today s nominal price of 90 2 points d Write down the hours that I had to work to buy 1 gallon of gas in 1973 Again assume you are eaming 600 per hour cash olT the books If you had to work the same number of hours to buy a gallon of gasoline as I did what would today s nominal price of gasoline per gallon have to be 4 points 12 The data below are derived from feed trials with broilers chickens Physical ef ciency is the pounds gained per pound of feed consumed as the birds age from one week to the next For example the physical ef ciency is 75 as we feed the birds from week 1 to week 2 65 as we feed the birds from week 2 to week 3 As the birds age they become less ef cient in converting feed to edible meat WEEK PHYSICAL EFFICIENCY ECONOMIC EFFICIENCY Pounds gained per pound of feed Price of Broiler 20 per pound consumed Price of Feed 08 per pound 1 2 075 3 065 4 061 5 057 6 049 7 041 8 039 9 035 a Compute the ECONOMIC EFFICIENCY of feed when broiler price is 20 per pound and feed costs are 08 per pound for the weeks indicated and record in the table above 5 points b How many weeks should the broilers be fed in order to maximize pro ts with respect to feed No guessing You must calculate the Economic Ef ciency correctly in the table above in order to get credit for this question 5 points 13 You have just purchased a new halfton extended cab pickup truck for 25000 including all taxes destination and delivery charges You expect to drive the truck 15000 miles each year You plan to drive the truck 5 years then sell it for 10000 Auto insurance will cost you 750 per year for liability insurance PLUS 24 per 1000 of coverage for collision and comprehensive insurance The property taX rate in your city and county totals 120 per 100 of value You paid cash for your new truck from savings in your money market account that was ea1ning 300 percent interest Tags will run you 2650 per year Annual inspection in your county will run 1950 per year a Please calculate the annual ownership costs for the truck below Show Your Work and all units 10 points Depreciation Intere st Property taxes Insurance Tags Inspection Fee Total Annual Ownership Cost b Total annual operating cost for this vehicle gas oil and grease tires and general maintenance is 1750 per year Please calculate total ownership and operating cost per MILE 10 points 14 You have just purchased a fourrow cotton picker for 225000 The salvage value of the cotton picker is 45000 The useful life of the cotton picker is 10 years You borrowed money to purchase the cotton picker at 800 percent The insurance rate on the cotton picker is 1000 per 1000 of value The property taX rate is 65 per 100 of value You plan to use the cotton picker 200 hours per year The cost of fuel oil repairs and maintenance is 6000 per hour of operation You will pay a worker 1000 per hour to operate the cotton picker The average performance rate of the picker is 295 hours per acre a What is the estimated ownership and operating cost of the cotton picker per hour Organize your work in a neat and orderly fashion Label all numbers with their respective units I am not going to hunt for answers 5 points b What is the estimated ownership and operating cost of the cotton picker per acre Organize your work in a neat and orderly fashion Label all numbers with their respective units I am not going to hunt for answers 5 points Bonus Questions 1 You are going into the shotgun shell reloading business You are trying to determine how many employees to hire to work the loading machine at a wage rate of 600 per hour Components shell casing primer wads shot and powder will cost 300 per box There are no xed costs overhead You can sell every box of shells you reload for 500 per box You get ve friends to come over just before dove season to load some shells and help you with some economic research After some initial training on the reloading machine you rst let one friend reload for an hour and count the number of shells loaded Then you let two friends reload for an hour and so on until all ve friends are working at the reloading machine each having a speci c task to perform The results are below Employees 1 2 3 4 5 Change in Quantity of Control Variable Boxes loaded per hour Total Revenue Marginal Revenue Total Marginal Cost Cost You must have correct answers in the table above to get credit for quotaquot and quotbquot below In other words guessing won39t cut it a Using marginal analysis how many employees should you hire to maximize pro ts 5 points b Suppose you hire the pro t maximizing number of employees and begin production A high school student from down the road comes to you and asks for a job a er school Heshe is a ne young person and you want to help himher out What is the maximum wage rate per hour you could pay this student and not diminish your pro ts from the current level This is tricky THINK 5 points 2 Accurately graph the following supply schedule for 7 to 8 ft Crimson King Maple trees for the Three Stooges Garden Center during the Fall planting season Construct your graph in the open space below ACCURATELY GRAPH TO SCALE AND LABEL 10 points Price Quantity demanded per month 30 80 22 60 18 50 14 40 6 20 2 10 3 Buzz Lightyear a native of rural Warren County NC is about to graduate from the famous Agricultural Institute with an Agribusiness Management Degree Buzz has been offered a job with Archer Daniels and Midland Corp in Decatur Illinois at a salary of 35000 per year Carolina Biological Supply Co located about 10 miles from Buzz s home place has offered him a job at a salary of 20000 per year The cost of living in both locations is nearly identical The benefit package offered by each company is the same Buzz has a beautiful girlfriend in all respects attending Louisburg College She is also from Warren County and will graduate next year They have discussed getting married Buzz loves to deer hunt and he has 15 Walkers that are the envy of every dog hunter in the county Warren County has a large deer herd and it is legal to hunt deer with dogs Hunting with dogs in Illinois is illegal All of Buzz s family lives in Warren County All of his girlfriend s family lives in Warren County Using the concepts of opportunity cost and the quotemotional overcoatquot write Buzz a letter about how he should evaluate his alternatives and make a decision 10 points
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