Question

1. Farmer considering a renewable (wind) energy contract to provide 1 acre of land for a single wind turbine. The turbine will be operational for 10 years and the wind energy company will pay the farmer $5,000 for access to the land. The farmer estimates that he averages about 185 bushels of corn on that acre each year and typically receives around $3.75 per bushel of corn. Per acre cost of farming include: Fertilizer $125 Pesticides $75 Seed $116 Drying $40 Storage $15 Utilities $5 Fuel $17 Labor $19 a. What are the farmer's explicit and implicit cost? b. What is his accounting and economic profit? c. Should he sign the contract? Why? d. Now assume that the farmer expects the price of corn to be $5.00/bushel over that timeframe. Should he sign the contract?

Answer 1

Since the farmer using pesticides to grow up the crops they are considered as direct materials. Explicit cost consists of, Fertilizer, pesticides, labour and seed. And it costs to $335. And implicit cost includes, fuel, drying, storage, and utilities, which is $77.

Accounting profit= Total revenue - explicit cost

Total revenue= 3.75*185*10 years= $6937.5

= $6937.5-($335 *10)= $3587.5

Economic profit=total revenue-(implicit cost +explicit cost)

=$6937.5-(($335+$77)*10)=$2817.5

C, yes, the farmer should sign the contract with the company, because compared to the profit earned from farming is less than the amount offered by the company ($5000).

D, when the price per bushel is $5, 185*5*10=$9250.

Accounting profit=9250-3350=$5900

Economic profit= 9250-(3350+770)=$5130

Now the farmer need not to sign any contract with the company, because he can earn lot more than what he got offered.