2. Given his plot of land, a farmer uses labor (10 workers), capital (5 pieces o

Question

2. Given his plot of land, a farmer uses labor (10 workers), capital (5 pieces of equipment), and fertilizer (5 tons) to produce corn. He has figured that each additional worker hired over the course of the growing season adds 5000 bushels to his crop. Each additional unit of capital, on the other hand, adds 10000 bushels to his annual yield. Finally, adding one unit of fertilizer increases the size of his crop by 8000. The annual wage of labor is $10,000, the yearly cost of one unit of capital is $4000, and a ton of fertilizer is also 4000.

Is the farmer's mix of inputs optimal?

If you were to advise the farmer to change the mix of its inputs, what would your advice be? Explain.

Explanation / Answer

each additional worker hired over the course of the growing season adds 5000 bushels to his crop

annual wage of labor is $10,000.

so money spent per 1000 bushel increase in crop is $2000.

Each additional unit of capital adds 10000 bushels to his crop

annual cost of one unit of capital is $4,000.

so money spent per 1000 bushel increase in crop is $400.

Each additional unit of fertilizer adds 8000 bushels to his crop

cost of 1 ton of fertilizer is $4,000.

so money spent per 1000 bushel increase in crop is $500.

so capital gives maximum benefit in terms of increase in output per dollar spent. so he should increase capital(equipment) and fertilizer and reduce labour. he should reduce the labour to minimum possible number required to operate the land and maximize the number of capital and fertilizer. this would increase the produce as well as reduce the total costs

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