A farm can produce either lettuce or strawberries on its available land. Production of lettuce starts at the end of one year with planting costs of $250. Harvesting occurs at the end of the following year, with harvesting costs of $75. The entire lettuce production for one year can be sold for $400.

As an alternative use of the land, strawberries can be planted at the end of one year, with planting costs of $80. Strawberries can grow 1 cubic meter in the 1st year. However, if you take the flowers off in the first year, you can capture 2 additional cubic meters in the second year. Repeating the operation would generate an additional 0.1 cubic meters in the 3rd year. The bush is removed after the harvest.

The harvesting cost of strawberries is $120, and the strawberries can be sold at $210 per cubic meter. After each harvest, new lettuce and/or new strawberry plants can be planted immediately. The costs detailed above are summarized in the table below (note: prices are in current dollars):

Use an interest rate of 6%.

a) If a farmer rents the land in order to grow lettuce for one year (from the end of this year to the end of next year), what is the highest payment the farmer is willing to offer for the rent if paid in this year?

b) If the farmer grows strawberry plants instead of lettuce, what is the profit after the first year? Second year? Third year? What is the optimal time to harvest?

c) Which should the farmer grow, lettuce or strawberries?

Crop Lettuce Strawberries Planting costs $250.00 $80.00 Harvesting Costs $75.00 $120.00 Selling Price $400 /harvest $210/ cubic meter Crop Lettuce Strawberries Planting costs $250.00 $80.00 Harvesting Costs $75.00 $120.00 Selling Price $400 /harvest $210/ cubic meter