If there is one profession that requires a firm understanding of profit-maximization, its farming. Farmers must respond to constantly fluctuating prices for their output, as well as constantly changing input prices. Furthermore, the farming industry satisfies the conditions of a competitive market because it is composed of thousands of individual price-taking farmers.

For a good illustration of farmers economic acumen, we can look at the recent history of American crop and farmland prices for the years 2003 to 2013. During this decade, prices for corn and soybeans rose steadily, reaching an all-time high in 2012 and 2013 as corn prices quadrupled and soybean prices tripled.

This long-term rise was mainly due to two demand-based factors. First, corn benefited from a congressional mandate to increase the use of corn-based ethanol, a biofuel that is blended into gasoline, as a means of reducing American dependency on imported oil. Second, crop prices were pushed upward by rapidly rising exports to China and other developing countries.

Being smart profit-maximizers, farmers responded by farming their land more intensively using more fertilizer, for example and by increasing their acreage. By 2013, the average price of farmland had tripled, with some farmland selling for its 2003 price.

Doing this made complete economic sense, as each farmer moved up his or her individual supply curve. And because the individual supply curve is the marginal cost curve, each farmers costs also went up as more inputs were employed to produce more output.

By 2016, crop prices fell by more than 50% from their 2012 high as the oil boom from fracking pushed down the price of ethanol and a strong US dollar reduced the demand by foreign buyers for American crops. On the supply side, bumper harvests [unusually productive harvests] in 2014 sharply depressed crop prices.

Thinking like economists, farmers responded by moving back down their supply curves, withdrawing from production the most expensive land to cultivate and reducing their demand for additional acreage. As a result, the price of Iowa farmland fell by 12% from 2012 to 2014, and, unsurprisingly, the price of fertilizer fell significantly as well.

1. Using two graphs, a supply and demand graph and a firm cost graph, illustrate how the congressional mandate and increased exports changed the firms choices about their production of corn between 2003 and 2012. Assume that firms begin at long-run equilibrium. You may submit either your graphs or a written description of your answer without graphs.

2. What happened to firm profits between 2003 and 2012?

3. How does your answer to #2 help to explain why prices fell in 2014?

4. Using two graphs, a supply and demand graph and a firm cost graph, illustrate how the oil boom and fall in exports changed the firms choices about the production of corn between 2012 and 2016. You may submit either your graphs or a written description of your answer without graphs.

5. Explain why the individual supply curve is the marginal cost curve.

6. How does your answer from #2 help to explain why the price of farmland tripled between 2003 and 2012?

7. Assume (as Ricardo did) that farmers farm the most productive land first. Illustrate on a graph with land on the horizontal axis and rental rate for land on the vertical axis the marginal product of land in 2003. How does this relate to the demand for land? You may submit either your graphs or a written description of your answer without graphs.

8. Using a graph of supply and demand for land, explain what happened to the rental rate of land between 2003 and 2012 and then between 2012 and 2016. Assume the supply of land is upward-sloping and very inelastic. You may submit either your graphs or a written description of your answer (including the shape of the supply curve) without graphs.