Principles of Food and Resource Economics

Part A: Conservation Farming and the 2018 Farm Act
The Agriculture Improvement Act of 2018 continues operating agricultural conservation programs in the United States designed to conserve and protect a valuable natural resource base. Two major pieces of this legislation are the Conservation Reserve Program (CRP) and the Environmental Quality Incentives Program (EQIP). The CRP pays landowners to retire environmentally sensitive land from production for a period of 10-15 years. This means that a producer who enrolls land in the CRP agrees to not produce anything on the land in exchange for an annual payment. EQIP provides financial incentives to individual farmers who adopt conservation practices on their farm. For example, EQIP will provide a farmer with roughly $500 per acre to install buffer strips (a strip of land planted with grass/legumes on the edges of fields to mitigate soil erosion and chemical runoff) on farmland.
For more information check out the following:

Claassen, R., D. Hellerstein, and S. Wallander. 2019. “2018 Farm Act Retains Conservation
Programs but Could Reduce Payments for Land Retirement”. U.S. Department of Agriculture Economic Research Service (ERS). Amber Waves.

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1. Define the concept of opportunity cost. Briefly discuss the opportunity cost of enrolling an acre of farmland in the CRP. Briefly discuss the opportunity cost of enrolling an acre of farmland in EQIP. (2 points)

2. When the government is evaluating farmer proposals to enroll land in CRP, the different proposals are ranked according to an Environmental Benefits Index to combine measures of the expected environmental benefits and the costs of the contract (Claassen et al. 2019). These rankings help determine which contracts are awarded. Using one (or more) of the key principles of economics discussed in class, explain why the government might use such a ranking system? Hint: Think about the government’s objectives and goals when implementing these programs. (2 points)

3. Suppose a corn farmer is potentially interested in enrolling acres in the CRP. They have yield monitor data from the previous agricultural year showing how many bushels each acre of land produced. Discussing the incentives facing the farmer, how should they decide which acres and how many to enroll in the program? (2 points)

4. Discuss the incentives (i.e. costs and benefits) farmers face when deciding to adopt a conservation practice like buffer strips. Why might there be less adoption than the government wants? How does a program like EQIP change the incentives faced by farmers? (2 points)

5. Suppose you’re talking with a corn farmer in Ohio who always adopts new conservation practices before they become eligible under EQIP. Using what you know about individual incentives, discuss why this does or does not reflect rational behavior on the part of the farmer. Hint: Consider both monetary and non-monetary incentives. (2 points)
Part B: Demand, Supply, and Market Equilibrium
Consider the following supply and demand functions for orange juice (P = price, Q = quantity):
Demand: 15𝑃$ + 𝑄$ = 150
Supply: 𝑄) − 10𝑃) = −10
6. Graph the above functions and calculate the equilibrium price and quantity for the above market. (2 points)

7. Suppose that orange juice prices are at $4. What is happening in the market? If there is a shortage or excess supply, calculate how much. Display this on your graph created in question 6. (2 points)

8. A new report suggests that citrus greening was worse than expected this year. Assuming that the new supply curve for orange juice is given by 𝑃+ = .1𝑄+ + 2, what is the new equilibrium price and quantity? (2 points)

9. Consider the following change in the market for orange juice. Suppose a research scientist finds a new link between consuming orange juice and heart health. What happens to demand, supply, equilibrium price and equilibrium quantity? Describe each effect qualitatively. Use a graph to help explain your reasoning. (2 points).

10. Consider the following changes in the market for orange juice. First, consumers view cranberry juice as a substitute for orange juice, and the price of cranberry juice falls. Second, a research scientist develops a new process for eradicating pests that spread disease in citrus groves. What happens to demand, supply, equilibrium price and equilibrium quantity? Describe each effect qualitatively. Use a graph to help explain your reasoning. (2 points)

Part C: Price Elasticity of Demand
11. Suppose the price elasticity of demand is -3, and the quantity demanded fell by 7.5%. By how much did the price change? Be sure to indicate if the price increased or decreased. (2 points)

12. Given the following demand schedule, calculate the price elasticity of demand for a price change from $47.50 to $53.75. Use the midpoint formula and show all work for full credit. (2 points)

Price ($) Quantity Demanded
60.00 7
53.75 14
47.50 21
41.25 28
35.00 35
28.75 42
22.50 49
16.25 56
10.00 63
3.75 70

13. Using the schedule above, calculate the elasticity of demand when price changes from $3.75 to $10. Again, show all of your work. Why are the calculated elasticities different? What factors may explain these differences. (2 points)

14. Suppose the state of Florida tests different tolls on a section of the Turnpike. When tolls were $6 there were 12,000 vehicles using that stretch of road. When the toll was raised to $8 there were 10,000 vehicles that used the road. Calculate and interpret (in a sentence) the price elasticity of demand for the increase in tolls using the midpoint method. Are tolls elastic, inelastic, or unit elastic? (2 points)

15. For the toll scenario described in the previous question, calculate government revenue under each scenario. Which amount would you recommend the government charge and why? (2 points)

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