This assignment asks you to think about private and external costs and benefits. Rather than explain the theory, you are asked to illustrate how the concepts apply to a specific farm and industry by calculating gains and losses based on production relationships and prices. 1. Wheat is produced in the Sacramento Valley using irrigation water and nitrogen fertilizer (together with land, labor, machinery, seed, and other inputs.) There are about 100,000 acres of wheat in the valley. You are considering decisions of a farm on a per acre basis. Assume for this question that using 35 pounds of nitrogen per acre and 20 acre-inches of irrigation water produces 600 pounds of wheat (approximately 10 bushels) which sells for $0.50 per pound. Nitrogen costs $0.40 per pound. Assume that if 30 pounds of nitrogen were applied (with the same costs for all other inputs) yield would be 594 pounds and that if 40 pounds of nitrogen were used; the yield would be 602 pounds of wheat. * Use these numbers to explain why an application rate of 35 pounds of nitrogen may seem reasonable for a grower deciding simply how much fertilizer to use. 2. Next consider irrigation. Assume the water costs $6 per acre- inch and applying 19-acre inches rather than 20 would reduce yield to 580 pounds and increasing irrigation water to 21 acre-inches would increase yield to 605. * Explain why 20 inches may seem like a reasonable choice for water application.