KEY for Exercise 4 ECON 460 Fall '96 Kilkenny

re: George Anthan, "The real impact of new policy" Des Moines Register Sunday, August 25, 1996, front page of section J "Farm&Country"

1. The PPF for corn and soybeans is nicely 'bowed out' to illustrate that if both corn and soybeans are grown, in rotation, more corn and soybeans can be produced per acre than if all land is just in continuous corn or continuous beans. When there is more than input, and the products require different inputs in different proportions (e.g. corn needs more nitrogen fertilizer, soybeans need more potash), the PPF should always be drawn "bowed out."

b. If Corn is on the vertical axis, the graphing version of the isorevenue equation:

Q_c = R/P_c - (P_B/P_c)Q_B

If beans are on your vertical axis:

Q_B = R/P_B - (P_c/P_B)Q_c

2. The optimal mix of corn and soybeans when government policy raises the price of corn relative to soybeans is to supply more corn (move along supply curve for corn) and less beans (shift supply of beans back).

3. If instead of farm policy, the higher corn price is due to a shift (increase) in demand from foreigners for corn, the optimal mix would change in the SAME way as described in (2).

4. The article reports that actual mixes of corn/soy haven't changed, even though price supports have been dropped. The article also reports that under previous farm bills, farmers were able to choose their optimal mix. This suggests that under previous farm programs, scenario (2) prevailed. The article reports that this year, foreign demand expansions have caused market prices to rise significantly. Under this scenario (just like (3) above) farmers would optimally plant the same mix that they did under (2). In other words, the optimal mix is the same this year as last year.

In sum, farmers currently are choosing the optimal mix. Just because the policy changed and the acreage allocations didn't, doesn't necessarily mean that the policy had no effect. It is also possible, however, that all farmers are just stubborn "creatures of habit" and that's why the mix hasn't changed. In that case, they're just lucky if it happens to be optimal, too.

In class, always assume that farmers (and everyone else) are intelligent and willing to adapt to increase their own welfare. Any other behavior would be self-destructive (sooner or later), and there would be no one left to analyze.