The supply of pastureland Many scientists and policy makers believe that land used for animal grazing purposes (pastureland) provides more environmental amenities than cropland (for instance, in terms of increased biodiversity, improved groundwater quality, etc.). One of the tenets of the new EU agricultural policy is thus to ensure that a certain amount of land is maintained as permanent pasture. In this problem, we will ask the question of how much farmers should be compensated (on a per acre basis) to maintain land in permanent pasture that they would otherwise have converted to crop production. To simplify, we assume that a farmer has two options for the use of his land: either growing wheat or keeping the land in permanent pasture. The total acreage under the farmer's control is 250 acres. If the farmer grows wheat, the net return (crop revenue minus operating costs) will be $100/acre. The farmer chooses the land use that brings the highest return.
1. On a graph with return per acre of pastureland on the horizontal axis and acreage maintained in pasture on the vertical axis, represent the farmer's supply of pasture land.
2. Is the pastureland supply function continuous? Justify your answer.
3. Now draw the (inverse) supply function for pastureland using the economic convention of putting price on the vertical axis and quantity on the horizontal axis. Now assume that the return to pastureland is $50/acre.
4. How many acres will the farmer maintain in pasture?
5. Compute the minimum pastureland subsidy that the government should pay to the farmer to make him keep the 250 acres of land in pasture.