CONTEXT

Consider a model of farm household decision-making in which there are no costs of participation in markets, and buying and selling prices are identical.

On the production side of the model, the household is endowed with capital K, a level of technology A, and a food production function Q = b(L, I, K; A), where L is labor input, I is fertilizer, and Q is food produced, and the function b(.) is a standard production function, increasing in all its arguments and exhibiting diminishing marginal productivity in L, I , and K. It faces output price pf, wage w, and fertilizer price q.

On the consumption and time allocation side of the model, the household is endowed with nonlabor income M and total time T and seeks to maximize utility U(F, N, H), which is a function of food consumption F, nonfood consumption N, and home time H. It allocates S units of time to work, whether on the farm or in the market, for the wage w, where H + S = T and it must satisfy the budget constraint that pfF+pnN=M+wS+(pfQwLqI), which says that its expenditures on consumer goods must equal the sum of nonlabor income, labor income, and farm profits.

We argued in the text that such a household will first choose L, I, and Q to maximize farm profits and then choose F, N, and H to maximize utility subject to the budget constraint pfF + pnN + wH = M + wT + (pf Q* wL* qI*), where the term in parentheses is maximized farm profits. The household takes as exogenous the variables K, A, q, w, pf, pn, M, and T, and it must choose the utilitymaximizing values of L, I, Q, F, N, H, and S.

QUESTIONS

a) Which of the exogenous variables influence household's productionside choices?

b) Which of the exogenous variables influence household's consumption and time allocationside choices (directly or indirectly)?

c) Discuss what the model predicts regarding an increase in A and an increase in M on all endogenous variables, as well as on NMS=QF and NLS=SL. (NOTE: When considering change in A or M, you should hold all other exogenous variables constant. Do not, for example, speculate how market prices pf and pn might change in response to the change in A or M).

(PLZ answer at least one of a, b, or c if unable to answer all- much thanks!!!!!!!!!!!!!)