Y7

Herb Time Farms (HTF) grows crocuses to produce the rare and expensive spice saffron. We will simplify its production process by assuming it produces saffron using only a single input, electricity (for lighting in its greenhouses). Its production function is given by y=f(x)=9x, where x is the amount of electricity used and y is the amount of saffron (in pounds) produced. Suppose that HTF can sell its saffron for $5,000 per pound and that it pays $500 per unit for electricity.

What is the profit-maximizing amount of electricity for HTF to use?

How many pounds of saffron does HTF produce when maximizing profits?

How much profit does HTF make? $

Suppose that the government decides to levy a tax on saffron. Here are two possible ways for a tax to be imposed. One possible taxation plan is to tax output and (possibly) subsidize input use. What happens if HTF is taxed $1,000 per pound of saffron that it produces and is subsidized $100 per unit of electricity?

What is its optimal input level under this tax/subsidy scheme?

What is its optimal level of production?

How much profit does it earn?

$ Another possible approach is to tax profits. What happens if HTF is required to pay a 30% tax on its profit?

What is its optimal input level under this taxation scheme?

What is its optimal level of production?

How much profit does it earn? $