2. Why do the farmer’s costs rise from the top to the bottom of the table (two reasons)? Biological pest control has high fixed costs associated with machinery and predator rearing; farmers experience substantial ‘‘learning by doing’’; and farmers also depend on ‘‘network externalities’’—information gained from fellow farmers and extension agents. Finally, if neighboring farmers are spraying pesticides, the pesticides will also kill off natural predators. Given these factors, assume we can write an average cost function per ton of output for an individual farmer using biological methods that looks like this:

ACb = $200 − 01Xb − 1yb + 0.01Xc where:

Xb = is tons of biological production in the region Xc = is tons of chemical production the region yb = is tons of the farmer’s production