Optimization Q&A

A revolutionary transformation has altered California’s farming culture from traditional family-based profit-maximizing organizations to massive corporate-based profit-maximizing setups. Big firms have started investing in California farms, which has spurred the shift in farming economic principles. Corporate farms in California are thriving in terms of investment earnings, with to economies of scale, tax breaks, and parity bailouts. Agribusiness model–as a norm of the concept of factories in the agricultural field–is on the rise in California as brought about by corporate farms. California growers have been successful in establishing a pattern of encompassing major agricultural lands into huge corporate farms through implementation of economies of scale in expanding the acreage under cultivation.

As evident from the above description that the world’s agricultural producers are different from Californian corporate farms in the sense that the former practices a subsistence farming culture where only producer’s own requirement is met by the cultivation and spare is left for trading. As for land ownership, unlike corporate farming concept prevailing in California, world’s agricultural producers own their lands family property and it passes between family members from generation to generation. Organic farming that does not degrade lands is practiced by these producers.

Answer to Question No 2.

The demand supply curve with output support is shown in the following graph.

Excess Supply

As seen here, that with output support, the demand drops and the surplus increases.

With fertilizer subsidy that does not increase output price, the supply shifts towards right, which means increase in supply not backed up by demand.

The demand will increase as shown in here.

3. The Net Benefit Ratio is calculated by the following formula:

NBR = PR – CR

Here, PR is the production of the corps as percentage of the income and CR is the consumption of the crops as percentage of the income.

For the household, A that produces $100 of output of the crop but does not consume any of it (selling $100 worth harvest in the market) and has a total income of $200.

PR = × 100%

= 50%

CR = × 100%

= 0%

NBR = 50% – 0% = 50%

For the household, B that produces $100 of output of the crop consumes $50 of it (selling $50 worth harvest in the market) and has a total income of $200.

PR = × 100%

= 50%

CR = × 100%

= 25%

NBR = 50% – 25% = 25%

For the household, C that produces $100 of output of the crop consumes $150 of it (purchasing $50 worth harvest in the market) and has a total income of $200.

PR = × 100%

= 50%

CR = × 100%

= 75%

NBR = 50% –75% = –25%

NBR Before Output Increase

Household

Production

Consumption

Sell

Income

PR

CR

NBR

A

100

0

100

200

50%

0%

50%

B

100

50

50

200

50%

25%

25%

C

100

150

-50

200

50%

75%

-25%

A 10% increase in price will cause a (percentage change in output price × income= 0.1 × 0.5 =) 5% increase in household income of A household, (0.1 × 0.25 =) 2.5% increase in household income for household B and (0.1 × –0.25 =) -2.5% decrease in household income of C household.

For the household, A that produces $100 of output of the crop but does not consume any of it (selling $110 worth harvest in the market) and has a total income of $210.

PR = × 100%

= 52%

CR = × 100%

= 0%

NBR = 52% – 0% = 52%

For the household, B that produces $100 of output of the crop consumes $50 of it (selling $60 worth harvest in the market) and has a total income of $205.

PR = × 100%

= 54%

CR = × 100%

= 24%

NBR = 54% – 24% = 30%

For the household, C that produces $100 of output of the crop consumes $150 of it (purchasing $50 worth harvest in the market) and has a total income of $195.

PR = × 100%

= 56%

CR = × 100%

= 77%

NBR = 56% –77% = –21%

NBR After Output Increase

Household

Production

Consumption

Sell

Income

PR

CR

After NBR

A

110

0

110

210

52%

0%

52%

B

110

50

60

205

54%

24%

29%

C

110

150

-40

195

56%

77%

-21%

From the NBR values, it is obvious that all the households are better off with the increased price; however, they overall status of them do not change as A and B still remain net seller and C remain net buyer.

4. If I were the Minister of Agriculture, I would choose the third one of the three policies listed in Question 2 as it would be the most effective at increasing the economic welfare of each of these three households. A transfer of cash into the market will shift the demand curve as more cash will be created in the market for consumers to buy more products. Eventually, the households will better be selling their agriculture products. On the other hand, high cash will reduce the price of fertilizer and other input to the agriculture and eventually help the farms produce products at lower price, which will further increase the demand. However, one thing should be noted here that all these effects will happen in short-term. To speak of long-term, there are many other factors associated and hence the response will vary.