Suppose that you own a 20-acre plot of land that you would like to rent out to w

Question

Suppose that you own a 20-acre plot of land that you would like to rent out to wheat farmers. For them, bringing in a harvest involves $35 per acre for seed, $80 per acre for fertilizer, and $70 per acre for equipment rentals and labor. With these inputs, the land will yield 40 bushels of wheat per acre. If the price at which wheat can be sold is $5 per bushel and if farmers want to earn a normal profit of $10 per acre, what is the most that any farmer would pay to rent your 20 acres? $ What if the price of wheat rose to $6 per bushel? $

Explanation / Answer

Let the profit function be = R-C

Where be profit, R is revenue and C is cost

To find rent “r “per acre

= R-C

Given that farmers want $10 per acre as profit, we will find rent per acre

R= 40*5= 200   and C= 35+80+70+ r

Substituting in profit function we have,

10=200-35-80-70-r

   Here we get r=$5 per acre

For 20 acres rent will be 20*5= $100

At the most farmers will pay $100 to rent the land.

What if price rises to $6 per Bushel?

R= 40*6= 240  

10=240-35-80-70-r

Here r=45

The rent per acre rose from $5 to $45. The rent for 20 acres also rises from $100 to $900.

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