Problem Set 1
EEP 141
1 The Middleman Model
Part A
In your own words (1-2 sentences each):
1. Briefly describe what a middleman is.
2. Give an example of a firm operating as a middleman and explain why it fits the description.
3. In lecture, we introduced extensions to the basic middleman model. For example, we dis-
cussed “learning,” which suggests efficiency will increase over time and may change how a
middleman invests. Name another extension and explain how it adds to the base model.
Part B
Let’s consider a middleman firm in the business of producing ethanol. Assume that the firm can
produce its own corn (the feedstock) or it can purchase corn from third party farmers. The firm
processes the corn into ethanol on its own.
To maintain consistency with your notes, let’s call our feedstock Xh (in-house) and Xm (third
party). Suppose the inverse demand curve is P = 67 − Q and the production function is Q =
f(X) = 2(Xh+Xm)
2. The cost of producing corn in-house is Ch(Xh) = 10+X
2
h. The cost function
of a third party producer is Cm(Xm) = 20 + 2X
2
m. Finally, the cost of processing feedstock from
either source is Cp(X) = 2(Xh +Xm)
2.
For this middleman, find the:
1. Marginal productivity of the input
2. Marginal revenue of the output (remember - this is Q, not X)
3. Marginal outlay
Part C
First, suppose that the middle man is unable to produce feedstock in-house due to land limitations.
He wants to determine the optimal level of Xm.
1. Write down the objective function.
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2. Write down the first order condition.
3. Solve for the optimal level of Xm
Part D
Next, assume there are no restrictions. The middle man wants to determine the optimal levels of
Xh and Xm.
1. Write down the objective function.
2. Write down the first order condition.
3. Solve for the optimal level of in-house feedstock in terms of third party feedstock, XhXm
2 Hedonics
Part A
In your own words,
1. Provide a short explanation of hedonic analysis.
2. Generally speaking, what does it allow us to estimate?
3. Give an example of a scenario where you could use hedonic pricing.
Part B
Let’s say we’re interested in the housing market, and homes only differ along four dimensions:
1. Number of bedrooms. This is a discrete variable.
2. Distance to schools. This is a binary variable that takes the value 1 for homes that are close
to schools and 0 for homes that are far from schools.
3. Yard size. This is a continuous variable in square feet.
4. House size. This is also a continuous variable in square feet.
Further assume that the price of homes is linear in these four attributes.
PRICE = α ∗BEDROOMS + β ∗DISTANCE + δ ∗ Y ARD + γ ∗ SIZE (1)
You are given the following data.
1. House 1: Bedrooms=3, Distance=0, Yard=1000, Size=1500. Price = $163,500
2. House 2: Bedrooms=4, Distance=0, Yard=500, Size=1000. Price = $193,000
3. House 3: Bedrooms=2, Distance=1, Yard=500, Size=1500. Price = $141,500
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4. House 4: Bedrooms=5, Distance=1, Yard=1000, Size=1000. Price = $269,000
5. House 5: Bedrooms=4, Distance=1, Yard=1500, Size=500. Price = ???
Find the prices of each attribute and the value of House 5.
3 Net Present Value
Part A
An ethanol processing facility costs $30,000 to construct and will last 5 years (it is constructed in
year 0 and runs from year 1 through year 5). It produces 2500 ba
els of ethanol per year and
can charge a price of $5 per ba
el. If the interest rate is 8%, what is the net present value of this
facility?
Part B
A different ethanol processing facility costs $800,000 to construct but will instead last forever.
Every year (starting the year after construction), it produces 10,000 ba
els of ethanol and can
charge a price of $4 per ba
el. At what interest rate would an investor be indifferent between
constructing the facility and simply keeping the money?
4 Amber Waves
An important part of agricultural economics is making information digestible for people who
may not be familiar with the material, including farmers, policymakers, or biologists. Several
journals are relatively “public-facing” in content - intentionally less technical and more accessible
to a
oad audience. Look through these sites, choose an article (cite it!), and summarize in 1-2
paragraphs.
Choices(http:
www.choicesmagazine.org/)
Amber Waves(https:
www.ers.usda.gov/amber-waves/)
ARE Update(https:
giannini.ucop.edu/publications/are-update/)
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