Evaluating a Proposed Agreement
Evaluate the landowner's proposal. Based on the principles of economic rent and reservation options, explain whether a mutually beneficial agreement is possible and why the farmer would accept or reject this specific offer.
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A farmer can produce 10 bushels of grain on a plot of land owned by another individual. If the farmer does not work on this land, she can produce 4 bushels on her own. The landowner's next best alternative is to receive 0 bushels. Under these conditions, why is there a potential for a mutually beneficial agreement between them?
Determining the Joint Surplus
Conditions for Joint Surplus
A joint surplus is created between a landowner and a farmer if, and only if, the total output the farmer can produce on the landowner's land is greater than the farmer's own reservation option (what she could achieve on her own).
Evaluating a Proposed Agreement
A farmer can produce 12 bushels of grain on a landowner's plot. If she doesn't work for the landowner, she can earn an equivalent of 5 bushels from an alternative job. The landowner's next best alternative for the land yields 0 bushels. Now, suppose a new government program is introduced that guarantees the farmer an income equivalent to 7 bushels if she is unemployed. How does this program affect the potential joint surplus from an agreement between the farmer and the landowner?
A farmer can produce 15 bushels of grain on a landowner's plot. If the farmer does not work on this land, she can produce 5 bushels on her own. The landowner's next best alternative for the land is to receive 0 bushels. In this scenario, the total joint surplus that can be created from their collaboration is ____ bushels.
Analyzing Changes in Surplus and Bargaining Power
A farmer is considering working on a plot of land owned by a landowner. The landowner's next best alternative for the land is to receive zero output. In which of the following scenarios is a mutually beneficial agreement between the farmer and the landowner NOT possible?
Consider an arrangement where a farmer can produce 100 bushels of wheat on a landowner's plot. The farmer's next best alternative is to work on another farm for an income equivalent to 40 bushels. The landowner's next best alternative for the land is to leave it fallow, yielding 0 bushels. Which of the following independent events would create the largest potential joint surplus?