Production with One Variable Input 17

The corn yields (TPP) generated by the production function in Table 2.2 are not the same
as those presented in Table 2.1. There is no reason for both functions to generate the same
yields. A continuous function that would generate exactly the same yields as those presented
in Table 2.1 would be very complicated algebraically. Economists like to work with
continuous functions, rather than discrete production functions from tabular data, in that the
yield for any level of input use can be readily obtained without any need for interpolation.
However, a tabular presentation would probably make more sense to farmers.

The yields generated in Table 2.2 also differ from those in Table 2.1 in another important
way. Table 2.1 states that if a farmer applied no nitrogen to corn, a yield of 50 bushels per
acre is obtained. Of course, nitrogen is absolutely essential for corn to grow. As indicated
earlier, the data contained in Table 2.1 assume that there is some residual nitrogen in the soil
on which the corn is grown. The nitrogen is in the soil because of decaying organic material
and leftover nitrogen from fertilizers applied in years past. As a result, the data in Table 2.1
reveal higher yields at low nitrogen application levels than do the data contained in Table 2.2.
The mathematical function used as the basis for Table 2.2 could be modified to take this
residual nitrogen into account by adding a constant such as 50. The remaining coefficients of
the function (the 0.75, the 0.0042, and the !0.000023) would also need to be altered as well.
Otherwise, the production function would produce a possible but perhaps unrealistic corn
yield of 50 + 136.944 = 186.944 bushels per acre when 180 pounds of fertilizer were applied.
For many production processes in agriculture, no input produces no output. Consider the case
of the production of beef using feed as an input. No feed would indeed produce no beef. In the
case of crop production, some yield will normally result without chemical fertilizers.

A production function thus represents the relationship that exists between inputs and
outputs. For each level of input use, the function assigns a unique output level. When a zero
level of input is used, output might be zero, or, in some instances, output might be produced
without the input.

2.2 Fixed Versus Variable Inputs and the Length of Run

So far, examples have included only one input or factor of production. The general form
of the production function was
†2.5 y = f(x)
where y = an output

x = an input

Equation †2.5 is an ultrasimplistic production function for agricultural commodities. Such a

function assumes that the production process can be accurately described by a function in
which only one input or factor of production is used to produce an output. Few, if any,
agricultural commodities are produced in this manner. Most agricultural commodities require
several, if not a dozen or more, inputs. As an alternative, suppose a production function where
there are several inputs and all but one are assumed to be held fixed at some constant level.
The production function would thus become

†2.6 y = f(x1, *x2, x3, x4, x5, x6, x7).

For example, y might be the yield of corn in bushels per acre, and x1 might represent the
amount of nitrogen fertilizer applied per acre. Variables x2, ..., x7 might represent each of the
other inputs used in the production of corn, such as land, labor, and machinery.
18 Agricultural Production Economics

Thus, in this example, the input x1 is treated as the "variable" input, while the remaining
inputs (x2, ..., x7) are assumed to be held constant at some fixed level. The "*" can be read as
the word "given". As the use of x1 is "varied" or increased, units of the variable input x1 are
added to units of the fixed inputs x2, ..., x7.

How can it be determined if an input should be treated as fixed or variable? A variable

input is often thought of as an input that the farm manager can control or for which he or she
can alter the level of use. This implies that the farmer has sufficient time to adjust the amount
of input being used. Nitrogen in corn production has often been cited as an example of a
variable input, in that the farmer can control the amount to be applied to the field.
A fixed input is usually defined as an input which for some reason the farmer has no
control over the amount available. The amount of land a farmer has might be treated as a
fixed input.

However, these distinctions become muddy and confused. Given sufficient time, a
farmer might be able to find additional land to rent or purchase, or the farmer might sell some
of the land owned. If the length of time were sufficient to do this, the land input might be
treated as a variable input.
The categorization of inputs as either fixed or variable is closely intertwined with the
concept of time. Economists sometimes define the long run as time of sufficient length such
that all inputs to the production function can be treated as variable. The very short run can
be defined as a period of time so short that none of the inputs are variable. Other lengths of
time can also be defined. For example, the short run is a period of time long enough such that
a few of the inputs can be treated as variable, but most are fixed. The intermediate run is long
enough so that many, but not all inputs are treated as variable.

These categories again are somewhat arbitrary. If an economist were asked "How long
is the short run?", the answer would probably be that the short run is a period of time
sufficiently long that some inputs can be treated as variable, but sufficiently short such that
some inputs can be treated as fixed. Does this imply a length of time of a day, a week, a
month, or a crop production season? The length of time involved could be any of these.
Once fertilizer has been applied, a farmer no longer has control over application levels.
The input that was previously classified as variable becomes fixed. Seed before planting is
classified as a variable input. Once it is planted in the ground, seed can no longer be treated
as a variable input.

Some production economists have argued that inputs should not be arbitrarily
categorized as either fixed or variable. These arbitrary categories can be highly misleading.
Production economists argue that in the case of crop production, prior to planting, nearly all
inputs are variable. Farmers might rent additional land, buy or sell machinery, or adjust
acreages of crops. Here is where real decision making can take place. Once planting begins,
more and more of the inputs previously treated as variable become fixed. Tractor time and
labor for tillage operations cannot be recovered once used. Acreages of crops once planted
largely cannot be altered. Insecticides and herbicides are variable inputs before application,
but must be treated as fixed or "sunk" once they have been applied. At the start of harvest,
the only variable input is the labor, fuel, and repairs to run the harvesting equipment and to
move the grain to market.

This view treats the input categories as a continuum rather than as a dichotomy. As
inputs are used, costs are treated as sunk. Inputs, once used, can no longer be sold, or used
on the farm for a different enterprise, such as another crop.
Production with One Variable Input 19

2.3 The Law of Diminishing Returns

The law of diminishing returns is fundamental to all of production economics. The law
is misnamed. It should be called the law of diminishing MARGINAL returns, for the law deals
with what happens to the incremental or marginal product as units of input or resource are
added. The law of diminishing marginal returns states that as units of an variable input are
added to units of one or more fixed inputs, after a point, each incremental unit of the variable
input produces less and less additional output. As units of the variable input are added to units
of the fixed inputs, the proportions change between fixed and variable inputs. The law of
diminishing returns has sometimes been referred to as the law of variable proportions.

For example, if incremental units of nitrogen fertilizer were applied to corn, after a point,
each incremental unit of nitrogen fertilizer would produce less and less additional corn. Were
it not for the law of diminishing returns, a single farmer could produce all the corn required
in the world, merely by acquiring all of the available nitrogen fertilizer and applying it to his
or her farm.

The key word in the law of diminishing returns is additional. The law of diminishing
returns does not state that as units of a variable input are added, each incremental unit of input
produces less output in total. If it did, a production function would need to have a negative
slope in order for the law of diminishing returns to hold. Rather, the law of diminishing
returns refers to the rate of change in the slope of the production function. This is sometimes
referred to as the curvature of the production function.

Figure 2.1 illustrates three production functions. The production function labeled A has
no curvature at all. The law of diminishing returns does not hold here. Each incremental unit
of input use produces the exact same incremental output, regardless of where one is at on the
function. An example of a function such as this is

†2.7 y = 2x.
Each incremental unit of x produces 2 units of y, regardless of the initial value for x, whether
it be 0, 24, 100 or 5000.
A slightly more general form of this function is
†2.8 y = bx.
where b is some positive number. If b is a positive number, the function is said to exhibit
constant marginal returns to the variable input x, and the law of diminishing returns does not
hold. Each incremental unit of x produces bx units of y.

The production function labeled B represents another kind of relationship.

Here each incremental unit of x produces more and more additional y. Hence the law of
diminishing returns does not hold here either. Notice that as the use of input x is increased,
x becomes more productive, producing more and more additional y. An example of a function
that would represent this kind of a relationship is

†2.9 y = x 2.
20 Agricultural Production Economics

Figure 2.1 Three Production Functions

A slightly more general form of the function might be

†2.10 y = axb,
where both a and b are positive numbers, and b is greater than 1. Notice that if b = 1, the
function is the same as the one depicted in diagram A of figure 2.1. The value of a must be
positive if the input is to produce a positive quantity of output.

The production function labeled C represents the law of diminishing returns throughout
its range. Here each incremental unit of x produces less and less additional y. Thus each unit
of x becomes less and less productive. An example of a function that represents this kind of
relationship is

†2.11 .

Another way of writing equation †2.11 is

†2.12 y = x0.5.
Both are exactly the same thing. For this production function, total product (TPP or y) will
never decline.

A slightly more general form of the function is

†2.13 y = axb,

where a and b are positive numbers. However, here b must be less than 1 but greater than
zero, if diminishing (marginal) returns are to hold. This function will forever increase, but at
a decreasing rate.
Production with One Variable Input 21

2.4 Marginal and Average Physical Product

The marginal physical product (MPP) refers to the change in output associated with an
incremental change in the use of an input. The incremental increase in input use is usually
taken to be 1 unit. Thus MPP is the change in output associated with a 1 unit increase in the
input. The MPP of input xi might be referred to as MPPx . Notice that MPP, representing the
i

incremental change in TPP, can be either positive or negative.

Average physical product (APP) is defined as the ratio of output to input. That is, APP
= y/x. For any level of input use (x), APP represents the average amount of output per unit of
x being used.
Suppose that the production function is

†2.14 y = f(x).

One way of expressing MPP is by the expression )y/)x, where the ) denotes change. The
expression )y/)x can be read as "the change in y ()y) with respect to a change in x ()x)."
For the same function APP is expressed either as y/x or as f(x)/x.
For the production function
†2.15 y = 2x,
MPP is equal to 2. The change in y with respect to a 1 unit change in x is 2 units. That is, each
additional or incremental unit of x produces 2 additional or incremental units of y. For each
additional unit of x that is used, TPP increases by 2 units. In this example APP equals y/x,
or APP equals 2x/x, or APP equals 2. For this simple production function MPP = APP = 2 for
all positive values for x.
For the production function

†2.16 y = bx,
MPP is equal to the constant coefficient b. The change in y with respect to a change in x is
b. Each incremental or additional unit of x produces b incremental or additional units of y.
That is, the change in TPP resulting from a 1 unit change in x is b. Moreover, APP = bx/x.
Thus, MPP = APP = b everywhere.

Marginal and average physical products for the tabular data presented in Table 2.1 may
be calculated based on the definition that MPP is the change in output ()y) arising from an
incremental change in the use of the input ()x) and that APP is simply output (y) divided by
input (x). These data are presented in Table 2.3. MPP is calculated by first making up a
column representing the rate of change in corn yield. This rate of change might be referred to
as )y or perhaps )TPP. Then the rate of change in nitrogen use is calculated. This might be
referred to as )x. Since 40 pound units were used in this example, the rate of change in each
case for x is 40. The corresponding MPP over the increment is )y/)x. MPP might also be
thought of as )TPP/)x. The corresponding calculations are shown under the column
labeled MPP in Table 2.3. For example, if nitrogen use increases from 120 to 160 pounds per
acre, or 40 pounds, the corresponding increase in corn yield will be from 123 to 128 bushels
per acre, or 5 bushels. The MPP over this range is approximately 5/40 or 0.125.
The MPP's are positioned at the midpoint between each fertilizer increment. The MPP's
calculated here are averages that apply only approximately at the midpoints between each
increment, that is at nitrogen application levels of approximately 20, 60, 100, 140 and 180
pounds per acre. Since no information is available with respect to what corn might have
22 Agricultural Production Economics

yielded at these midpoints, the calculated MPP's are at best approximations that might in
certain instances not be very accurate.

Table 2.3 also includes calculations for average physical product. Average physical
product (APP) is defined as the ratio of output to input. That is, APP = y/x. For any level of
input use (x), APP represents the average amount of output per unit of x being used. In Table
2.3, APP is calculated by dividing corn yield by the amount of nitrogen. These calculations
are presented in the column labeled APP. The values for APP are exact at the specified levels
of input use. For example, the exact APP when 120 pounds of nitrogen is applied is 115/120
or 0.958.

Table 2.3 MPP and APP for Corn Yield Response to Nitrogen Fertilizer
)))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))
Quantity of Yield of
Nitrogen Corn
(lb/acre) )x (bu/acre) )y MPP APP
))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))
0 50 50/0 = undefined
40 25 25/40 = 0.625
40 75 75/40 = 1.875
40 30 30/40 = 0.75
80 105 105/80 = 1.313
40 10 10/40 = 0.25
120 115 115/120 = 0.958
40 8 8/40 = 0.20
160 123 123/160 = 0.769
40 5 5/40 = 0.125
200 128 128/200 = 0.640
40 !4 !4/40 = !0.100
240 124 124/240 = 0.517
))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))

2.5 MPP and the Marginal Product Function

The procedure described in section 2.4 for calculating MPP's is tedious and time
consuming. There exists a quicker and more accurate means for calculating MPP and APP
if the production function is given.
The MPP ()y/)x) represents the slope or rate of change in the production function. The
production function itself is sometimes referred to as total physical product (or TPP) function.
The MPP function refers to the function representing the rate of change in the TPP function.
If the slope of the TPP function were to be graphed, the result would be the MPP function,
representing the rate of change in the TPP or the underlying production function as the use
of variable input x is varied.

Given the TPP function (or production function), the MPP function (or marginal product
function) might easily be obtained. Suppose again that the TPP or production function is
represented by

†2.17 y = 2x

Again, the incremental increase in y associated with a 1 unit increase in the use of x is 2 units.
Hence MPP = 2. Moreover, )y/)x = 2. In this case the marginal product function is equal
to the constant 2.
Production with One Variable Input 23

For functions that do not have a constant slope, the expression )y/)x can only
approximate the slope of the function at a given point (Figure 2.2). The approximation can
be very crude and inaccurate if a large value for )x is chosen for the incremental change in
x. This approximation improves as the value for )x is chosen to be smaller and smaller. If the
exact slope or MPP of a production function is to be found at a specific point, the magnitude
of )x must become infinitely small. That is, )x must approach zero.

Figure 2.2 Approximate and Exact MPP

One way for finding the exact slope of a production function at a particular point is
shown in Figure 2.2. Suppose that the exact MPP at point D is desired. A line is drawn
tangent to the production function at D. which intersects the vertical axis at point B. The
exact MPP at point D is equal to the slope of this line. This slope can be expressed as BC/OA.
The graphical approach is time consuming, particularly if the MPP at several points along
the function are to be calculated. A better way might be to find the first derivative of the
production function. The first derivative of the production function is defined as the limit of
the expression )y/)x as )x approaches zero. As )x becomes smaller and smaller, )y/)x
becomes a better and better approximation of the true slope of the function. The first
derivative, dy/dx, represents the exact slope of the production function at a particular point.
In Figure 2.2, at point D, dy/dx = BC/OA.

For the production function

†2.18 y = f(x),

the first derivative dy/dx of equation †2.18 is a function that represents the slope, or rate of
change in the original production function and is sometimes written as

†2.19 dy/dx = fN(x) or f1,

24 Agricultural Production Economics

where fN(x) or f1 represents the first derivative of, or the rate of change in the original function.
Another way of expressing these relationships is

†2.20 dy/dx = fN(x) = f1 = dTPP/dx = MPP.

All expressions refer to the rate of change in the original production or TPP function. For the
production function
†2.21 y = 2x

†2.22 dy/dx = dTPP/dx = MPP = 2

Throughout the domain of this production function, the rate of change is a constant 2. Each
additional unit of x produces 2 additional units of y. The first derivative of this production
function [fN(x) or f1] is 2 for all values of x. Note that in this case dy/dx is exactly the same
as )y/)x. This is because the slope of the function is a constant 2, not dependent on the
value of x.
Suppose the production function

†2.23 y = bx,
where b is any positive number. Again b is the MPP of x. The derivative of the production
function dy/dx is b. Each incremental unit of x will produce b units of y. If x is increased by
1 unit from any initial level, TPP will increase by b units. If b were negative, then TPP would
decrease, but this would be a silly production function because positive amounts of x would
result in negative amounts of y. It is not entirely clear what a negative bushel of corn would
look like. Again, b is constant, and dy/dx will always equal )y/)x.
Now suppose that the production function is represented by the equation
†2.24 y = 50 + 5.93 x 0.5.
The MPP of x for this function is not the same for every value of x. To calculate the MPP at
a particular value for x, not only the derivative of the production function is needed, but also
how much x is applied. Two simple rules can be used to find the derivative of any production
function similar to the one above.

The first rule states that the derivative of any constant value in a function is 0. In this
case, the derivative of 50 is 0. The constant is an intercept term that places the function at x
= 0 on the y axis at 50. A constant does not affect the slope of the function. The second rule
is that the derivative of any function of the general form

†2.25 y = bxn can be found by the rule

†2.26 dy/dx = nbxn!1

where n and b are any numbers. For example, the derivative of the function y = x2 is dy/dx
= 2x; the derivative of the function y = 3x4 is dy/dx = 3A4Ax3 or 12x3. If these functions were
production functions, their corresponding derivatives would be the corresponding marginal
product functions, representing the slopes or rates of change in the original production

nitrogen fertilizer [equation †2.26] is dy/dx = 0 + 0.5A5.93Ax!0.5, or dy/dx equals 2.965x!0.5.

functions. The derivative for the production function representing corn yield response to
Production with One Variable Input 25

A number raised to a negative power is 1 over the number raised to the corresponding
positive power: for example,

†2.27 x!2 = 1/x2

In this case

†2.28 dy/dx = 2.965/x.5

or
(2.29) dy/dx = 2.965/ x

If the amount of x to be applied is known, the corresponding TPP is 50 + 5.93x0.5, and

the corresponding MPP is 2.965/x0.5. In this case, MPP is specifically linked to the amount of
x that is used, as x appears in the first derivative. If this is the case, dy/dx will provide the
exact MPP but will not be the same as the approximation calculated by )y/)x.

production function [equation †2.24]. The first method computes the rate of change in the
Table 2.4 presents MPP's calculated by two methods from yield data obtained from this

yields for 40!pound fertilizer increments as was done in the earlier example (Table 2.3). The
second method inserts values for nitrogen application levels into the MPP function obtained
by taking the derivative of the original production function. The values chosen are at the
midpoints (20, 60, 100, 140 and 180 pounds of nitrogen per acre).
As is evident from Table 2.4, the results using the two methods are not the same.
Method 1 provides the approximate MPP at the midpoint. However, for certain fertilizer
application levels (for example at 20 pounds per acre) the MPP using this first method is very
different from the MPP obtained by inserting the actual midpoint value into the MPP function.
This is because the production function is curvilinear, and the slope calculated using method
1 is only a crude approximation of the exact slope of the production function over each
40!pound increment of fertilizer use.
Table 2.4 MPP of Nitrogen in the Production of Corn
Under Two Alternative Approaches
))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))
Quantity of Corn Yield Average MPP Exact MPP
Nitrogen (y or TPP) Method Method
(lb/acre) (bu/acre) 1 2
)))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))
0 50.0
0.9375 0.6630 (N = 20 lb/Acre)
40 87.5
0.3875 0.3827 (N = 60 lb/Acre)
80 103.0
0.3000 0.2965 (N = 100 lb/Acre)
120 115.0
0.2500 0.2506 (N = 140 lb/Acre)
160 125.0
0.2225 0.2212 (N = 180 lb/Acre)
200 133.9
)))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))
26 Agricultural Production Economics

As is evident from Table 2.4, the results using the two methods are not the same.
Method 1 provides the approximate MPP at the midpoint. However, for certain fertilizer
application levels (for example at 20 pounds per acre) the MPP using this first method is very
different from the MPP obtained by inserting the actual midpoint value into the MPP function.
This is because the production function is curvilinear, and the slope calculated using method
1 is only a crude approximation of the exact slope of the production function over each
40!pound increment of fertilizer use.
The derivative of the function will provide the exact slope of the function at any
selected nitrogen application level. Therefore, the calculated MPP values from method 2 are
highly accurate for the assumed levels of nitrogen use. Using method 2, the MPP can be
calculated at any selected level of fertilizer use (including the application levels of 40, 80, 140,
160, and 200 pounds per acre). Basic differential calculus is a powerful tool in agricultural
production economics.

Finally, assume that the production function describing corn yield response to nitrogen
fertilizer is the one used as the basis for the data contained in Table 2.5. That function was

†2.30 y = 0.75x + 0.0042x2 ! 0.000023x3

equation †2.30 is
Following the rules for differentiation, the marginal product function corresponding to

†2.31 dy/dx =0.75 + 0.0084x ! 0.000069x2

Since APP is y/x, the corresponding APP function is

†2.32 y/x = (0.75x + 0.0042x2 ! 0.000023x3)/x
= 0.75 + 0.0042x ! 0.000023x2

Table 2.5 illustrates the exact APP and MPP values for equation †2.30 obtained by inserting
†2.31] and APP †equation †2.32].
the amount of x (nitrogen) appearing in the first column of the Table into the MPP [equation

Table 2.5 Corn Yields, APP and MPP for y = 0.75x + 0.0042x2 ! 0.000023x3
)))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))
x y (Corn) APP of x, MPP of x,
(Nitrogen) or TPP y/x dy/dx
)))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))
0 0.0 undefined 0.7500
20 16.496 0.8248 0.8904
40 35.248 0.8812 0.9756
60 55.152 0.9192 1.0056
80 75.104 0.9388 0.9804
100 94.000 0.9400 0.9000
120 110.736 0.9228 0.7644
140 124.208 0.8872 0.5736
160 133.312 0.8332 0.3276
180 136.944 0.7608 0.0264
200 134.000 0.6700 !0.3300
220 123.376 0.5608 !0.7416
240 103.968 0.4332 !1.2084
)))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))

2.6 A Neoclassical Production Function

Figure 2.3 illustrates a neoclassical production function that has long been popular for
describing a production relationships in agriculture. With this production function, as the
Production with One Variable Input 27

Figure 2.3 A Neoclassical Production Function

28 Agricultural Production Economics

use of input x1 increases, the productivity of the input at first also increases. The function
turns upward, or increases, at first at an increasing rate. Then a point called the inflection
point occurs. This is where the function changes from increasing at an increasing rate to
increasing at a decreasing rate. Another way of saying this is that the function is convex to
the horizontal axis prior to the inflection point, but concave to the horizontal axis after the
inflection point. The inflection point marks the end of increasing marginal returns and the start
of diminishing marginal returns. Finally, the function reaches a maximum and begins to turn
downward. Beyond the maximum, increases in the use of the variable input x1 result in a
decrease in total output (TPP). This would occur in an instance where a farmer applied so
much fertilizer that it was actually detrimental to crop yields.

2.7 MPP and APP for the Neoclassical Function

The MPP function changes as the use of input x1 increases. At first, as the productivity
of input x1 increases, so does its marginal product, and the corresponding MPP function must
be increasing (Figure 2.3). The inflection point marks the maximum marginal product. It is
here that the productivity of the incremental unit of the input x1 is at its greatest. After the
inflection point, the marginal product of x1 declines and the MPP function must also be
decreasing. The marginal product of x1 is zero at the point of output maximization, and
negative at higher levels. Therefore, the MPP function is zero at the point of output
maximization, and negative thereafter.

Average physical product (APP) also changes as the use of x1 increases, although APP
is never negative. As indicated earlier, APP is the ratio of output to input, in this case y/x1 or
TPP/x1. Since this is the case, APP for a selected point on the production function can be
illustrated by drawing a line (ray) out of the origin of the graph to the selected point. The
slope of this line is y/x1 and corresponds to the values of y and x1 for the production function.
If the point selected on the function is for some value for x1 called x*, 1 then the APP at x*1 is
y/x*.
1

APP reaches a maximum at a point after the inflection point but before the point in which
output is maximized. Figure 2.3 illustrates several lines drawn out of the origin. The line with
the greatest slope is tangent to the production function at that point. Therefore it also
represents the slope of the production function at that point. The slope of each line drawn from
the origin to a point on the production function represents the APP for the function at that
point, but only one line is tangent to and thus also represents the slope of the production
function at that point. It is here where marginal product must equal average product, APP
must equal MPP, and y/x = dy/dx.

Call the point x1° where y/x = dy/dx. At any point less than x1°, the slope of the
production function is greater than the slope of the line drawn from the origin to the point.
Hence APP must be less than MPP prior to x1°. As the use of x1 increases toward x1°, APP
increases, as does the slope of the line drawn from the origin. After x1°, the slope of the
production function is less than the slope of the line drawn from the origin to the point. Hence
MPP must be less than APP after x1°. As the use of x1 increases beyond x1°, the slope of the
line drawn from the origin to the point declines, and APP must decline beyond x1°. The slope
of that line never becomes negative, and APP never becomes negative.

However, a line drawn tangent to the production function represents MPP and will have
a negative slope beyond the point of output maximization. APP is always non-negative, but
MPP is negative beyond the point of output maximization.
Production with One Variable Input 29

Figure 2.3 also illustrates the relationships that exist between the APP and the MPP
function for the neoclassical production function. The MPP function first increases as the use
of the input is increased, until the inflection point of the underlying production function is
reached (point A). Here the MPP function reaches its maximum. After this point, MPP
declines, reaches zero when output is maximum (point C), and then turns negative. The APP
function increases past the inflection point of the underlying production function until it
reaches the MPP function (point B). After point B, APP declines, but never becomes negative.
The relationships that hold between APP and MPP can be proven using the composite
function rule for differentiation. Notice that
†2.33 y = (y/x)Ax, or TPP= APPAx in the original production or TPP function.

†2.34 dy/dx = y/x + [d(y/x)/dx]Ax

or, equivalently, MPP = APP + (slope of APP)x.

If APP is increasing and therefore has a positive slope, then MPP must be greater than APP.
If APP is decreasing and therefore has a negative slope, MPP must be less than APP. If APP
has a zero slope, such as would be the case where it is maximum, MPP and APP must be
equal.

Figure 2.4 illustrates the TPP, MPP, and APP curves that are generated from the data
contained in Table 2.5. The maximum of the production function corresponds to an output
level of 136.96 bushels of corn per acre, using a nitrogen application rate (x) of 181.60
pounds per acre. The inflection point of this production function corresponding with the
maximum MPP occurs at an output level of 56.03 bushels of corn (y), with a corresponding
nitrogen application rate of 60.86 pounds per acre, The APP maximum, where MPP
intersects APP, occurs at an output level of 85.98 bushels of corn per acre, with a
corresponding nitrogen (x) application rate of 91.30 bushels per acre. The actual production
function illustrated from the data contained in Table 2.5 appears quite similar to the
neoclassical function illustrated in Figure 2.3.

2.8 Sign, Slope and Curvature

By repeatedly differentiating a production function, it is possible to determine accurately
the shape of the corresponding MPP function. For the production function
†2.35 y = f(x)

the first derivative represents the corresponding MPP function

†2.36 dy/dx = fN(x) = f1 = MPP
Insert a value for x into the function fN(x) [equation †2.36]. If fN(x) (or dy/dx or MPP) is
positive, then incremental units of input produce additional output. Since MPP is negative
after the production function reaches its maximum, a positive sign on fN(x) indicates that the
underlying production function has a positive slope and has not yet achieved a maximum. If
fN(x) is negative, the production function is downsloping, having already achieved its
maximum. The sign on the first derivative of the production function indicates if the slope of
the production function is positive or negative and if MPP lies above or below the horizontal
axis. If MPP is zero, then fN(x) is also zero, and the production function is likely either
constant or at its maximum. Figure 2.5 illustrates seven instances where the first derivative
of the TPP function is positive [(a) to (g)] and seven instances where the first derivative is
negative [(h) to (n)].
.
30 Agricultural Production Economics

Figure 2.4 TPP, MPP, and APP For Corn (y) Response to Nitrogen (x)
Based on Data Contained in Table 2.5
Production with One Variable Input 31

Figure 2.5 MPP’s for the Production Function y = f(x)

f1 = MPP; f2 = slope of MPP; f3 = curvature of MPP

The first derivative of the TPP function could also be zero at the point where the TPP
function is minimum. The sign on the second derivative of the TPP function is used to
determine if the TPP function is at a maximum or a minimum. If the first derivative of the
TPP function is zero and the second derivative is negative, the production function is at its
maximum. If the first derivative of the TPP function is zero, and the second derivative is
positive, the production function is at its minimum point. If both the first and second
derivatives are zero, the function is at an inflection point, or changing from convex to the
horizontal axis to concave to the horizontal axis. However, all inflection points do not
necessarily have first derivatives of zero. Finally, if the first derivative is zero and the second
derivative does not exist, the production function is constant.
The second derivative of the production function is the first derivative of the MPP
function, or slope of the MPP function. The second derivative (d2y/dx2 or fO(x) or f2) is
obtained by again differentiating the production function.

†2.37 d2y/dx2 = fO(x) = f2 = dMPP/dx

32 Agricultural Production Economics

If equation †2.37 is positive for a particular value of x, then MPP is increasing at that
particular point. A negative sign indicates that MPP is decreasing at that particular point. If
fO(x) is zero, MPP is likely at a maximum at that point. In figure 2.4, the first derivative of
the MPP function (second derivative of the TPP function) is positive in (a), (b), and (c), (l),
(m),and (n); negative in (e), (f), (g), (h), (i), and (j), and zero in (d) and (k).
The second derivative of the MPP function represents the curvature of MPP and is the
third derivative of the original production (or TPP) function. It is obtained by again
differentiating the original production function
†2.38 d3y/dx3 = f“(x) = f3 = d2MPP/dx2

The sign on f“(x) for a particular value of x indicates the rate of change in MPP at that
particular point. If MPP is in the postive quadrant and f“(x) is positive, MPP is increasing
at an increasing rate [(a) in Figure 2.5] or decreasing at a decreasing rate (e). If MPP is in the
negative quadrant, a positive f“(x) indicates that MPP is either decreasing at a decreasing rate
(j) or increasing at a decreasing rate (l).
When MPP is in the positive quadrant, a negative sign on f“(x) indicates that MPP is
either increasing at a decreasing rate (c), or decreasing at an increasing rate (g). When MPP
is in the negative quadrant, a negative sign on f“(x) indicates that MPP is decreasing at an
increasing rate (h) or increasing at an increasing rate (n).
If f“(x) is zero, MPP has a constant slope with no curvature as is the case in (f), (l), and
(m). If MPP is constant, f“(x) does not exist.
A similar approach might be used for APP. APP equals y/x, and if y and x are positive,
then APP must also be positive. As indicated earlier, the slope of APP is
†2.39 d(y/x)/dx = fN(y/x) = dAPP/dx
For a particular value of x, a positive sign indicates a positive slope and a negative sign a
negative slope.
The curvature of APP can be represented by
†2.40 d2(y/x)/dx2 = fO(y/x) = d2APP/dx2

rate, or decreasing at a decreasing rate. A negative sign on equation †2.40 indicates that APP
For a particular value of x, a positive sign indicates that APP is increasing at an increasing

is increasing at a decreasing rate, or decreasing at an increasing rate. A zero indicates an APP

of constant slope. The third derivative of APP would represent the rate of change in the
curvature of APP.
Here are some examples of how these rules can be applied to a specific production
function representing corn yield response to nitrogen fertilizer. Suppose the production
function

†2.41 y = 50 + 5.93 x0.5

where
y = corn yield in bushels per acre
x = pounds of nitrogen applied per acre

†2.42 MPP = fN(x) = 2.965 x!0.5 > 0

Production with One Variable Input 33

For equation †2.41, MPP is always positive for any positive level of input use, as indicated
by the sign on equation †2.42. If additional nitrogen is applied, some additional response in
terms of increased yield will always result. If x is positive, MPP is positive and the
production function has not reached a maximum.
†2.43 dMPP/dx = fO(x) = !1.48 x!1.5 < 0

If equation †2.43 is negative, MPP is slopes downward. Each additional pound of nitrogen
that is applied will produce less and less additional corn yield. Thus the law of diminishing
(MARGINAL) returns holds for this production function throughout its range.

†2.44 d2MPP/dx2 = f“(x) = 2.22 x!2.5 > 0

If equation †2.44 holds, the MPP function is decreasing at a decreasing rate, coming closer
and closer to the horizontal axis but never reaching or intersecting it. This is not surprising,
given that incremental pounds of nitrogen always produce a positive response in terms of
additional corn.
†2.45 APP = y/x = 50/x + 5.93x!0.5

= 50 x!1 + 5.93x!0.5 > 0

positive [equation †2.45].

If x is positive, APP is positive. Corn produced per pound of nitrogen fertilizer is always

†2.46 dAPP/dx = d(y/x)/dx = !50 x!2 ! 2.97 x!1.5 < 0

per unit of nitrogen declines [Equation †2.46].

If x is positive, APP is sloped downward. As the use of nitrogen increases, the average product

†2.47 d2APP/dx2 = d2(y/x)/dx2 = 100x!3 + 4.45 x!2.5 >0

the average product per unit of nitrogen decreases but at a decreasing rate [equation †2.47].
If x is positive, APP is also decreasing at a decreasing rate. As the use of nitrogen increases,

2.9 A Single-Input Production Elasticity

The term elasticity is used by economists when discussing relationships between two
variables. An elasticity is a number that represents the ratio of two percentages. Any
elasticity is a pure number in that it has no units.

The elasticity of production is defined as the percentage change in output divided by the
percentage change in input, as the level of input use is changed. Suppose that xN represents
some original level of input use that produces yN units of output. The use of x is then increased
to some new amount called xO, which in turn produces yO units of output. The elasticity of
production (Ep) is defined by the formula

†2.48 Ep = [(yN ! yO)/y]/[(xN ! xO)/x].

where y, yO, x, and xO are as defined previously, and x and y represent mid values between the
old and new levels of inputs and outputs. Thus

†2.49 x = (xN + xO)/2

and y = (yN + yO)/2

34 Agricultural Production Economics

Since the elasticity of production is the ratio of two percentages, it does not depend on
the specific units in which the input and output are measured. For example, suppose that y
represents corn yield in bushels per acre, and x represents nitrogen in pounds per acre. Then
suppose that corn yield is instead measured in terms of liters per hectare, and nitrogen was
measured in terms of kilograms per hectare. If the same amount of nitrogen is applied in both
instances, the calculated value for the elasticity of production will be the same, regardless of
the units in which y and x are measured.
Another way of expressing the elasticity of production is

†2.50 Ep = ()y/y)/()x/x)

where )y = y N ! y O
and )x = x N ! x O
The elasticity of production is one way of measuring how responsive the production
function is to changes in the use of the input. A large elasticity (for example, an elasticity of
production greater than 1) implies that the output responds strongly to increases in the use of
the input. An elasticity of production of between zero and 1 suggests that output will increase
as a result of the use of x, but the smaller the elasticity, the less the response in terms of
increased output. A negative elasticity of production implies that as the level of input use
increases, output will actually decline, not increase.
The elasticity of production can also be defined in terms of the relationship between
MPP and APP. The following relationships hold. First
†2.51 Ep = ()y/y)/()x/x)
Equation †2.51 might also be written as
†2.52 Ep = ()y/)x)A(x/y)
Notice that
†2.53 )y/)x = MPP
and that
†2.54 x/y = 1/APP

Thus

†2.55 Ep = MPP/APP
Notice that a large elasticity of production indicates that MPP is very large relative to
APP. In other words, output occurring from the last incremental unit of fertilizer is very great
relative to the average output obtained from all units of fertilizer. If the elasticity of
production is very small, output from the last incremental unit of fertilizer is small relative to
the average productivity of all units of fertilizer.
Production with One Variable Input 35

2.10 Elasticities of Production for a Neoclassical Production Function

A unique series of elasticities of production exist for the neoclassical production
function, as a result of the relationships that exist between MPP and APP. These are
illustrated in Figure 2.6 and can be summarized as follows

Figure 2.6 MPP, APP and the Elasticity of Production

1. The elasticity of production is greater than 1 until the point is reached where MPP = APP
(point A).
2. The elasticity of production is greatest when the ratio of MPP to APP is greatest. For the
neoclassical production function, this normally occurs when MPP reaches its maximum at the
inflection point of the production function (point B).
3. The elasticity of production is less than 1 beyond the point where MPP = APP (point A).

4. The elasticity of production is zero when MPP is zero. Note that APP must always be
positive (point C).
5. The elasticity of production is negative when MPP is negative and, of course, output is
declining (beyond point C). If the production function is decreasing, MPP and the elasticity
of production are negative. Again, APP must always be positive.
6. A unique characteristic of the neoclassical production function is that as the level of input
use is increased, the relationship between MPP and APP is continually changing, and therefore
the ratio of MPP to APP must also vary. Since Ep = MPP/APP, the elasticity of production
too must vary continually as the use of the input increases. This is a characteristic of the
neoclassical production function, which in general is not true for some other production
functions.
36 Agricultural Production Economics

2.11 Further Topics on the Elasticity of Production.

The expression )y/)x is only an approximation of the true MPP of the production
function for a specific amount of the input x. The actual MPP at a specific point is better
represented by inserting the value of x into the marginal product function dy/dx.
The elasticity of production for a specific level of x might be obtained by determining
the value for dy/dx for that level of x and then obtaining the elasticity of production from the
expression

†2.56 Ep = (dy/dx)Ax/y

Now suppose that instead of the neoclassical production function, a simple linear relationship
exists between y and x. Thus
†2.57 TPP = y = bx
where b is some positive number. Then dy/dx = b, but note also that since y = bx, then y/x
= bx/x = b. Thus MPP (dy/dx) = APP (y/x) = b. Hence, MPP/APP = b/b = 1.
The elasticity of production for any such function is 1. This means that a given
percentage increase in the use of the input x will result in exactly the same percentage increase
in the output y. Moreover, any production function in which the returns to the variable input
are equal to some constant number will have an elasticity of production equal to 1.
Now suppose a slightly different production function
†2.58
Another way of writing equtation †2.58 is
†2.59 y = ax0.5

In this case
†2.60 dy/dx = 0.5 ax!0.5
And

†2.61 y/x = ax!0.5

Thus, (dy/dx)/(y/x) = 0.5
Hence the elasticity of production is 0.5. This means that for any level of input use MPP will
be precisely one half of APP. In general, the elasticity of production will be b for any
production function of the form

†2.62 y = axb

where a and b are any numbers. Notice that

†2.63 dy/dx = baxb!1

and that
†2.64 y/x = axb/x = axbx!1 = axb!1.
Production with One Variable Input 37

(Another way of writing the expression 1/x is x!1. Therefore, y/x = yx!1. But y = axb, and, as
a result, xbx!1 = xb!1.)

Thus the ratio of MPP to APP!the elasticity of production! for such a function is
always equal to the constant b. This is not the same as the relationship that exists between
MPP and APP for the neoclassical production function in which the ratio is not constant but
continually changing as the use of x increases.

2.12 Concluding Comments

This chapter has outlined in considerable detail the physical or technical relationships
underlying the factor-product model. A production function was developed using tabular,
graphical, and mathematical tools, with illustrations from agriculture. The law of diminishing
MARGINAL returns was introduced. Marginal and average physical product concepts were
developed. The rules of calculus for determining if a function is at a maximum or minimum
were outlined, using a total physical product and marginal physical product concepts to
illustrate the application. Finally, the concept of an elasticity of production was introduced,
and the elasticity of production was linked to the marginal and average product functions.

Problems and Exercises

1. Suppose the following production function data. Fill in the blanks.
)))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))
x (Input) y (Output) MPP APP
)))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))
0 0 )))
)))
10 50 )))
)))
25 75 )))
)))
40 80 )))
)))
50 85 )))
)))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))

2. For the following production functions, does the law of diminishing returns hold?

a. y = x0.2
b. y = 3x
c. y = x3
d. y = 6x ! 0.10x2
3. Find the corresponding MPP and APP functions for the production functions given in
problem number 2.
38 Agricultural Production Economics

4. Assume a general multiplicative production function of the form

y = 2xb

Derive the corresponding MPP and APP functions, and draw on a sheet of graph paper TPP,
APP and MPP when the value of b is

a. 5 f. 0.7
b. 3 g. 0.3
c. 2 h. 0
d. 1.5 i. -0.5
e. 1.0 j. -1.0

Be sure to show the sign, slope and curvature of MPP and APP. What is the value for the
elasticity of production in each case? Notice that the curves remain at fixed proportion from
each other.

5. Graph the production function

y = 0.4x + 0.09x2 ! 0.003x3

for values of x between 0 and 20. Derive and graph the corresponding MPP and APP. What
is the algebraic expression for the elasticity of production in this case? Is the elasticity of
production constant or variable for this function? Explain.

6. Suppose that the coefficients or parameters of a production function of the polynomial form
are to be found. The production function is

y = ax + bx2 + cx3
where y = corn yield in bushels per acre
x = nitrogen application in pounds per acre
a, b and c are coefficients or unknown parameters

The production function should produce a corn yield of 150 bushels per acre when 200
pounds of nitrogen is applied to an acre. This should be the maximum corn yield (MPP = 0).
The maximum APP should occur at a nitrogen application rate of 125 pounds per acre. Find
the parameters a, b and c for a production function meeting these restrictions. Hint: First find
the equation for APP and MPP, and the equations representing maximum APP and zero MPP.
Then insert the correct nitrogen application levels in the three equations representing TPP,
maximum APP and zero MPP. There are three equations in three unknowns (a, b, and c).
Solve this system for a, b, and c.
 39

3
Profit Maximization
with One Input
and One Output
This chapter introduces the fundamental conditions for profit maximization in the single input
single output or factor- product case. The concept of the total value of the product and the
value of the marginal product is introduced. The value of the marginal product and the
marginal factor cost are equal at the point of profit maximization. Profits are normally
maximum when the implicit value of the last dollar spent on an input is one dollar. Stages of
production are described, and an explanation of why a farmer would choose to operate in
stage II is given.

Key terms and definitions:

Total Value of the Product (TVP)
Profit
Revenue
Cost Function
Value of the Marginal Product (VMP)
Total Factor Cost (TFC)
Marginal Factor Cost (MFC)
Average Value of the Product (AVP)
First Order Condition
Second Order Condition
Necessary Condition
Sufficient Condition
Maximum Profits
Minimum Profits
Stages of Production (I, II, and III)
Rational Stage
Irrational Stage
Implicit Worth
Imputed Value
Shadow Price
40 Agricultural Production Economics

3.1 Total Physical Product Versus Total Value of the Product

As indicated in Chapter 2, the output (y) from a production function can be also called
total physical product (TPP). If a firm such as a farm is operating under the purely
competitive conditions, the individual farm firm can sell as little or as much output as desired
at the going market price. The market price, p, does not vary. A constant price might be called
p°. Since

†3.1 TPP = y,

both sides of equation †3.1 can be multiplied by the constant price p°. The result is
†3.2 p°TPP = p°y.

The expression p°y is the total revenue obtained from the sale of the output y and is the
same as p°TPP. The expression p°TPP is sometimes referred to as the total value of the
product (TVP). It is a measure of output (TPP) transformed into dollar terms by multiplying
by p°. For a farmer, it represents the revenue obtained from the sale of a single commodity,
such as corn or beef cattle. If the output price is constant, the TVP function has the same
shape as the TPP function, and only the units on the vertical axis have changed (Figure 3.1).

Figure 3.1 The Relationship Between TVP, VMP, AVP, and MFC
Profit Maximization with One Input and One Output 41

3.2 Total Factor or Resource Cost

Suppose that production requires only one input. Suppose also that a farmer can
purchase as much of this input as is needed at the going market price v. The purely
competitive environment is again assumed to exist. The market price for the input, factor, or
resource does not vary with the amount that an individual farmer purchases. Thus the market
price might be designated as v°. The term v°x can be referred to as total factor cost or total
resource cost. These terms are sometimes abbreviated as TFC or TRC. Hence

†3.3 TRC = TFC = v°x.

The TFC function has a constant slope, in this case equal to v°. Another way of looking
at v° is that it is the increase in cost associated with the purchase of an additional unit of the
input. The increase in cost is equal to the price of the input v°.

3.3 Maximizing the Difference between Returns and Costs

A farmer might be interested in maximizing net returns or profit. Profit (A) is the total
value of the product (TVP) less the total factor cost (TFC). The profit function for the farmer
can be written as

†3.4 A = TVP ! TFC.

Or, equation †3.4 might be written as
†3.5 A = p°y ! v°x
Figure 3.2 illustrates the TVP function, the TFC function, and the profit function,
assuming that the underlying production function is of the neoclassical form as described in
detail in chapter 2. The profit function is easily drawn, since it is a graph representing the
vertical difference between TVP and TFC. If TFC is greater than TVP, profits are negative
and the profit function lies below the horizontal axis. These conditions hold at both the very
early stages as well as the late stages of input use. Profits are zero when TVP = TFC. This
condition occurs at two points on the graph, where the profit function cuts the horizontal axis.
The profit function has a zero slope at two points. Both of these points correspond to points
where the slope of the TVP curve equals the slope of the TFC curve. The first of these points
corresponds to a point of profit minimization, and the second is the point of profit
maximization, which is the desired level of input use.

The slope of the profit function can be expressed (using ) notation) as )A/)x. Hence

†3.7 )A/)x = )TVP/)x !)TFC/)x

The slope of the function is equal to zero at the point of profit maximization (and at the point
of profit minimization!more about this later). Therefore, the slope of the TVP function
()TVP/)x) must equal the slope of the TFC function ()TFC/)x) at the point of profit
maximization.

3.3 Value of the Marginal Product and Marginal Factor Cost

The value of the marginal product (VMP) is defined as the value of the incremental unit
of output resulting from an additional unit of x, when y sells for a constant market price p°.
42 Agricultural Production Economics

Figure 3.2 TVP, TFC, VMP, MFC, and Profit

Profit Maximization with One Input and One Output 43

The VMP is another term for the slope of the TVP function under a constant product price
assumption. In other words, VMP is another name for )TVP/)x. Since TVP = p°TPP, the
VMP must equal p° )TPP/)x. But )TPP/)x = MPP. Therefore, VMP must be equal to
p°MPP.

The marginal factor cost (MFC), sometimes called marginal resource cost (MRC), is
defined as the increase in the cost of inputs associated with the purchase of an additional unit
of the input. The MFC is another name for the slope of the TFC function. Note that if the
input price is assumed to be constant at v°, then MFC = v°These relationships might also be
expressed by
†3.6 A = TVP ! TFC
3.4 Equating VMP and MFC
The points where the slope of TVP equals the slope of TFC corresponds either to a point
of profit minimization or a point of profit maximization. These points are also defined by

†3.8 p° MPP = VMP = MFC = v°

Figure 3.2 also illustrates these relationships. MFC, being equal to a constant v°, is a straight
line. Notice that APP can be multiplied by the price of the product p°, and is sometimes
referred to as average value of the product (AVP). It is equal to p°APP or p°y/x, or in this case
$4.00@(APP).

There are many ways of rearranging the equation p° MPP = v°. One possibility is to
divide both sides of the equation by the output price p°. Then at the point of maximum profit,
MPP must be equal to v°/p°, the factor/product price ratio. Another possibility is to divide
both sides of the equation by average physical product (APP) or y/x. The profit maximizing
condition would then be given by

†3.9 MPP/APP = (v°x)/(p°y)

However, MPP/APP is the elasticity of production for x. The term v°x represents total
factor cost. The term p°y represents total revenue to the farm, since it is the price of the output
times output. At the point of profit maximization, the elasticity of production will be exactly
equal to the ratio of total factor cost to total revenue for the farm.

The data contained in Table 2.5 can be used to determine how much nitrogen fertilizer
should be applied to the corn. To do this, prices must be assigned both to corn and to the
nitrogen fertilizer. Assume that the price of corn is $4.00 per bushel and that nitrogen costs
$0.15 per pound. These data are presented in Table 3.1.

Several comments can be made with regard to the data contained in Table 3.1. First,
at a nitrogen application level of 180 pounds per acre, the MPP of nitrogen is calculated to
be 0.0264. The number is very close to zero and suggests that maximum yield is at very close
to an application rate of 180 pounds per acre. The MPP is calculated by first differentiating
the TPP or production function to find the corresponding MPP function
†3.10 y = 0.75x + 0.0042x2 ! 0.000023x3

†3.11 dy/dx = 0.75 + 0.0084x ! 0.000069x2

44 Agricultural Production Economics

Table 3.1 Profit Maximization in the Application of Nitrogen to Corn

)))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))
Quantity Corn Yield MPP of p° VMP MFC (v°) Profit (B)
of Nitrogen (bu/acre) Nitrogen ($) (p°MPP) ($) ($)
)))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))
0 0.0 0.7500 4.00 3.0000 0.15 0.0
20 16.496 0.8904 4.00 3.5616 0.15 62.98
40 35.248 0.9756 4.00 3.9024 0.15 134.99
60 55.152 1.0056 4.00 4.0224 0.15 211.61
80 75.104 0.9804 4.00 3.9216 0.15 288.42
100 94.000 0.9000 4.00 3.6000 0.15 361.00
120 110.736 0.7644 4.00 3.0576 0.15 424.94
140 124.208 0.5736 4.00 2.2944 0.15 475.83
160 133.312 0.3276 4.00 1.3104 0.15 509.25
180 136.944 0.0264 4.00 0.1056 0.15 520.78
200 134.000 !0.3300 4.00 !1.3200 0.15 506.00
220 123.376 !0.7416 4.00 !2.9664 0.15 460.50
240 103.968 !1.2084 4.00 !4.8336 0.15 379.87
)))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))

Then the MPP at x = 180 is

MPP = 0.75 + 0.0084(180) ! 0.000069(180)2 = 0.0264
However, since at the point where x = 180, MPP is still positive, the true yield maximum must
be at a nitrogen application level of slightly greater than 180 pounds per acre, where dy/dx =
MPP = 0.
Profits appear to be greatest at a nitrogen application rate of 180 pounds per acre.
However, at 180 pounds per acre, the return from the incremental unit of nitrogen (the VMP
of x) is $0.1056, whereas its cost is $0.15. The results suggest that the last unit of nitrogen
that was used returned less than it cost. The profit-maximizing level of nitrogen use must be
at slightly less than 180 pounds per acre. If the input is not free, the profit-maximizing level
of input use will always be somewhat less than the level of input use that maximizes the
production function. In many instances, however, the difference between the
profit-maximizing level of input use and the yield-maximization level of input use may not be
very large. In this case the incremental pound of nitrogen must return corn worth only $0.15
in order to cover its cost. If corn sells for $4.00 per bushel, this is but $0.15/$4.00 = 0.0375
bushel of corn from the incremental pound of nitrogen.

The difference between the level of nitrogen needed to maximize profits versus the
amount needed to maximize output and total revenue does not appear to be very great. If
nitrogen were free, there would be no difference at all. As the price of nitrogen increases, the
level of nitrogen required to maximize profits is reduced. For example, if nitrogen sold for
$1.00 per pound, the last pound of nitrogen applied would need to produce 0.25 bushel of corn
at $4.00 per bushel. In general, the distinction between the point representing maximum profit
and the point representing maximum revenue becomes more and more important as input
prices increase.

If the price of fertilizer is very cheap, the farmer will lose little by fertilizing at a level
consistent with maximum yield rather than maximum profit. However, if fertilizer is
expensive, the farmer needs to pay close attention to the level of input use that maximizes
profits. The same analysis holds true for other inputs used in agricultural production processes
for both livestock and crops.
Profit Maximization with One Input and One Output 45

Profits per acre of corn in this example appear to be extraordinarily high, but remember
that the production function describing corn yield response to the application of nitrogen
assumes that all other inputs are fixed and given. The cost per acre for these inputs could be
calculated. Suppose that this turns out to be $450 per acre. This value could be subtracted
from each value in the profit column. Conclusions with regard to the profit maximizing level
of nitrogen use would in no way be altered by doing this.

3.5 Calculating the Exact Level of Input Use to Maximize Output or

Profits
The exact level of input use required to maximize output (y) or yield can sometimes be
calculated. Several examples will be used to illustrate problems in doing this with various
production functions. From the earlier discussion it is apparent that if output is to be at its
maximum, the MPP of the function must be equal to zero. The last unit of input use resulted
in no change in the output level and requires that MPP = dy/dx = 0 at the point of output
maximization.
Suppose the production function

†3.12 y = 2x
In this case

†3.13 MPP = dy/dx = 2 (and not zero!)

The MPP is always 2, and 2 cannot be equal to zero, and the production function has no
maximum. A more general case might be the production function
†3.14 y = bx
†3.15 MPP = dy/dx = b = 0 ?
If b were zero, regardless of the amount of x that was produced, no y would result. For any
positive value for b, the function has no maximum. Now suppose the production function
†3.16 y = x0.5

†3.17 MPP = dy/dx = 0.5 x!0.5 = 0 ?

The only value for x is zero for which the MPP would also be equal to 0. Again, this function
has no maximum. In general, any function of the form
†3.18 y = axb
where a and b are positive numbers, has no maximum.

Now suppose a production function

†3.19 y = 10 + 8x ! 2x2

†3.20 dy/dx = 8 ! 4x = 0
†3.21 4x = 8

†3.22 x=2
46 Agricultural Production Economics

Equation †3.19 has a maximum at x = 2. In general, a production function of the form

†3.23 y = a + bx + cx2
where
a>
_0
b>0
c<0

will have a maximum at some positive level of x.

Finally, the output-maximizing level of input use can be found for the production
function used in Chapter 2

†3.24 y = 0.75x + 0.0042x2 ! 0.000023x3

First, differentiate to find MPP, and then set MPP equal to 0
†3.25 MPP = dy/dx = 0.75 + 0.0084x ! 0.000069x2 = 0
Now recall from basic algebra that a polynomial of the general form
†3.26 y = ax2 + bx + c
has two solutions for x. These solutions are

†3.27

For this production function (Equation †3.24), a = !0.000069, b = 0.0084 and c = 0.75.
One solution generates a negative value for x, which can be ruled out as economically
impossible. The second solution is 181.595 units of x, which is the output-maximizing level
of nitrogen use (or a slightly greater value than 180, where MPP was 0.0264).
The exact amount of nitrogen required to maximize profits in corn production can be
calculated by using a similar approach. A few production functions that do not have an output
maximum do have a profit maximizing solution. First, if profits are maximum or minimum,
the slope of the profit function must be equal to zero.

The total value of the product (TVP) is equal to

†3.28 TVP = p°y
where p° = $4.00 per bushel

y = yield of corn in bushels per acre

The relationship between corn yield and nitrogen use is again given by the production
function written in the general form as

†3.29 y = f(x)

where x is the amount of nitrogen fertilizer applied in pounds per acre. Thus