AAE 320 Exam # 1 Review

1. AAE 320 Exam # 1 Review Paul D. Mitchell

2. Goal • Explain what to expect for exam • Overview topics on exam • Give idea of how to study

3. What to Expect • Organization & format similar to last year • Mostly problems that test your knowledge of major concepts • Few other questions: maybe true false or short answer? • Look at previous exams on the class page for example format and questions

4. Major Topics • We have covered three main topics 1) Economically optimal input use with a single input production function 2) Economically optimal input use with a multiple (2) input production function 3) Cost Economics: opportunity cost and economically optimal output level

5. Single Input Production • Examined economically optimal input use in tabular and functional forms • Economic problem: Choose x to maximize p = pf(x) – rx • Optimality condition: VMP = r or MP = r/p • Tabular Approach: Think Brk #1 and #2, Problem Set #1 Question 1 • Calculus Approach : Think Brk #3 and #4, Problem Set #1 Question 2

6. Single Input Production • You will want to know calculus, as there will be a problem like Think Break #4, or Problem Set #1 Question #2 • See Calculus review on homepage, plus notes and Think Break #3 • Remember: set up problem, find FOC, solve for input X, check SOC, then find output and net returns/profit.

7. Multiple Input Production • Examined economically optimal input use in tabular and functional forms • Economic problem: Choose x and y to maximize p = pf(x,y) – rxx – ryy • Optimality conditions: VMPx = rx and VMPy = ry, plus MPx/MPy = rx/ry • Ratio of MP’s = Marginal Rate of Technical Substitution = Slope of Isoquant = – DY/DX – DY/DX = rx/ry(notice the switch in x and y)

8. Multiple Input Production • Know how to find economically optimal input combination • Tabular approach: MRTS = input price ratio (Think Break #6, Problem Set #2 Question 1) • Calculus approach: (Think Break # 7, Problem Set #2 Question 2 • Partial Derivatives review: Think Break # 5 • Remember: set up problem, find FOC’s, solve for inputs X and Y, check SOC, then find output and net returns/profit.

9. Cost Economics • We covered three topics within cost economics • 1) Opportunity cost and economic profit • 2) Different types of cost functions and their relations: TC, VC, FC, ATC, AVC, MC • 3) Economically optimal output condition: p = MC, connection with min ATC, min AVC, profit and supply

10. Opportunity Cost • How to calculate opportunity costs (Problem Set #2 Question 3) • What it means if economic profit is positive, zero, or negative • Using economic profit for decision making: Think Brk #8, Problem Set #2 Question 3

11. Cost Functions • Know the definitions (TC, MC, etc.) and how to draw them in proper relations (see class overheads, plus old exam) • Know how to calculate them in Tabular form and how to identify economic optimum in table (Think Break #11, Problem Set #3 Question 2) • Interpretation: p = pQ – C(Q), so p = MC defines p max which is supply curve, but have lower limits: min ATC, min AVC (see class overheads, plus old exam) • Use calculus to maximize p = pQ – C(Q) (Problem Set #3, Question 3)

12. Don’t Forget • Don’t forget about the first few lectures! • Last year’s exam had some true/false that tested basic knowledge of these materials • Wisconsin Agriculture • Strategic Management • What it takes to be great • The Flat Objective Problem • Agribusiness Job Market Preparation

13. How to Study • Know the Think Breaks and the Problem Sets and how to work these types of problems from memory • Read over or do from memory the old exams • Exam will focus on the optimality conditions and their use to make decisions on input use/output production, with a few question on the material covered in the first lectures • Email/call me with questions, we can meet in my office if needed