Monday, February 11, 2008

A Bluffing Farmer?

Consider the following statement from a corn farmer to his workers:

"The price of corn is very low this year, and the most I can get from the crop is $55,000. If I paid you the same amount as I paid you last year ($50,000), I'd lose money, because I also have to worry about the $30,000 I paid three months ago for seed and fertilizer. I'd be crazy to pay a total of $80,000 to harvest a crop I can sell for only $55,000. If you are willing to work for half as much as last year ($25,000), my total cost will be $55,000, so I'll break even. If you don't take a pay cut, I won't harvest the wheat."

Is the farmer bluffing, or will the farmworkers lose their jobs if they reject the proposed pay cut? Explain.

Congratulations to Yang Di for providing the first, complete, answer to the above dilemma. Read the comments section to see Di's reasoning.


Yaoguang Li said...

The farmer should chosse to bluffing if they reject the proposed pay cut. If he doesn't to do so, he would lose all of his workers. And also, the $30,000 that he had spent was the sunk cost and it should be ignored in decisions about the future actions.

Yaoguang Li

Yifan Huang said...

the farmer is bluffing,the $30,000is sunk cost,it won't influence now the economic mostly,can ignore it.what he say like this, this the workers don't know how is the$30,000.If the farmer pay the $50,000to the worker, he still earn $5,000.and the payment to the workers & the expense of the seed and fertilizer should be considered as the explicit costs.should caculate before make a ecomomic avtivity.

Yifan Huang

yangdi said...

The farmer is bluffing. If all the farmworkers refuse to take a pay cut, then according to what the farmer said, he won't harvest the wheat. In this case, he will lose $30,000. Consider if farmworkers refuse to take a pay cut and the farmer still pays $50,000, then he will only lose $55,000-$80,000 = -$25,000. Clearly, the farmer will be better off even if he paid $50,000 to farmworkers. Therefore, the farmworkers should reject the proposed pay cut.

Di Yang

Ashley Gault said...

I think that the farmer is bluffing. Albeit that he would have to spend $80,000 to harvest that crop, that is an untrue number. The $30,000 is a sunk cost to him, which should be ignored. By cutting the workers pay in half, it will create more of a profit for him. I don't think the workers will lose their jobs if they refuse this supposed "pay cut" because then he would be "losing out" by even MORE if he didn't harvest the corn at all.

Lang said...

the farmer is bluffing. he can get $55000 from all his crops. if he harvest only half of them, the harvested crops won't worth $55000.for the $30000, he has to pay it everyear,so it can be ignored. The workers won't lose a job. if they don't do the harvest, then the farmer can't sell them, and he won't certainly get that $55000 for selling the crops,.

Bryan Adams said...

The farmer should pay his workers what they want because if they reject the pay-cut he will be out 30,000 dollars for not harvesting the crops. If he harvests the crops and sells them for 55,000 his total cost would be 80,000 and he would only lose 25,000 dollars. So the farmer is bluffing and the workers shouldn't take the pay cut.