In this assignment, you will integrate your knowledge from all three weekly outcomes. After reviewing the âFrom the Expertâ video this week, consider the problem of the apple farmer. In your own words, explain the farmerâs optimal solution in the free market using marginal cost analysis. How might this solution be suboptimal from societyâs perspective? Explain who benefits and is harmed under the free market solution. Explain who benefits and is harmed under the government subsidy solution? Using economic analysis and the guiding principles of sustainability, justify which solution is best.
SPEAKER 1: Jan owns an apple orchard and it's harvesting season. She has a bumper crop and needs to calculate how many apples she should pick in order to maximize her profits. For thepurposes of this example, she will sell all of her apples to the local cider mill for $0.50 each.
Jan knows that to maximize her profits, she should continue to harvest apples until she reaches the point that the marginal revenue equals the marginal cost. Jan calculates her marginal cost usingthe cost of ladder rentals and the wages of the apple pickers.
The apples on the bottom third of the tree are the cheapest to harvest at a marginal cost of $0.30 per apple. This is because her workers can pluck apples off the bottom of the tree without a ladder.To harvest from the middle of the tree, employees will take more time to pick the apples, which increases the cost of labor. Also, a small ladder is needed. This increases the marginal cost to $0.45.Harvesting from the top of the tree would increase her labor costs per hour, and also requires renting a bigger ladder. This results in $0.55 cents marginal cost.
Since Jan can only get $0.50 for an apple, she will stop picking apples when the marginal cost is greater than the marginal revenue she receives. Thus, she will harvest the apples at the bottom of thetree, and she will make $0.20 per apple. She will also harvest those apples in the middle and make $0.05 per apple. However, she won't harvest the apples at the top, because she would lose $0.05on each one.
With this example, the market economy would theoretically deem it most efficient to just leave the apples high up on the trees to rot. Some people believe that the government should providesubsidies to industries that would leave food and other essential goods to waste. Subsidies, however, cost other resources and create an unfair market.
Should the apples at the top of the tree be left to rot? Or should someone step in and get involved? What do you think should be done?
