Question

Unskilled workers in a poor cotton-growing region must choose between working in a factory for $6,000 a year and being a tenant cotton farmer. One farmer can work a 120-acre farm, which rents for $10,000 a year. Such farms yield $20,000 worth of cotton each year. The total nonlabor cost of producing and marketing the cotton is $4,000 a year. A local politician whose motto is “working people come first” has promised that if he is elected, his administration will fund a fertilizer, irrigation, and marketing scheme that will triple cotton yields on tenant farms at no charge to tenant farmers.
a. If the market price of cotton would be unaffected by this policy and no new jobs would be created in the cotton-growing industry, how would the project affect the profits of tenant farmers in the short run? In the long run?

Short-run economic profit: $ per lease.
Long-run economic profit: $ per lease.

b. Who would reap the benefit of the scheme in the long run? How much would they gain each year?

________ would gain $____ per plot each year due to _________

Answer 1

Answer:

a. Short-run economic profit: $  40,000  per lease.

Long-run economic profit: $  0  per lease.

b. Landowners would gain $40,000 per plot each year due to higher rent for land

Explanation:

The short-run economic profit for a cotton farmer is:

Economic profit = Total revenue - Explicit costs - Implicit costs = $60,000 - $14,000 - $6,000 = $40,000 per lease.

Landowners would reap the long-term benefits of the scheme. Their income would rise by $40,000 per year per 120-acre plot because rent would rise from $10,000 to $50,000.