Notation for the Agricultural Household Model

Setup: The consumer owns a farm, and must decide how much labor and land to use on the
farm, how much labor and land to sell (rent) on the market to others, and how to divide his
time between labor (which could be used on his own farm or someone elses) and leisure. The
output that the farm produces can either be consumed or sold on the market. This document
summarizes the notation used in the model.

Prices:
p price of output.
w price of labor (wage rate).
r price of land (rental rate).
Buying and Selling labor and land are taken to mean hiring in labor or working for
someone else. Buying and Selling of land mean renting land from someone else or renting it to
someone else.

Consumer Preferences:
c consumption (measured in units of farm output).
l leisure (measured in hours).

Preferences uc, l, strictly monotonic and strictly quasiconcave.

Consumer Endowment:
A E land endowment.
L E labor (time) endowment.

Subscript U denotes quantity used on farm, subscript S denotes quantity sold on market.
Hence we have:
A E A U A S , (1)
L E L U L S l. (2)
Production Function:
L total labor used on farm.
A total land used on farm.
Labor used on the farm is either provided by the consumer (L U ) or hired (L B ). Hence:
L L U L B . (3)
Similarly,
A A U A B . (4)
Production Function: FL, A, strictly monotonic and strictly concave.

Maximization Problem:
max uc, l
s. t. : wL B rA B pFL, A c wL S rA S ,
and 1 4.
where the left-hand side of the budget constraint is total expenditure and the right-hand side is
total revenue.
 (Agricultural Household Model Continued)
Separation Result:
If land and labor markets are perfect (complete), then the owner maximized utility by first
maximizing profit, regardless of uc, l. That is, production decisions, L and A, can be
separated from consumption decisions, l and c.

Budget Constraint:
wL B L S rA B A S pFL, A c
(3) L L U L B
(2) l L E L U L S
The previous two lines give L B L S L l L E
(1) A A U A B
(4) A U A E A S
The previous two lines give A B A S A A E
Substituting these two expressions into the budget constraint above yields:
wL l L E rA A E pFL, A c
wl pc pFL, A wL rA wL E rA E
wl pc wL E rA E
where pFL, A wL rA is the profit earned on the farm.
Notice that the left-hand side of the last line is the cost of consuming l and c, and the right
hand side is profit on the farm plus the value of the endowment. Production variables L and A
only appear on the right, and consumption variables l and c only appear on the left. Hence this
consumer maximizes utility by choosing L and A to make the budget set as large as possible
and then choosing l and c in order to maximize utility. The shape of uc, l may affect choices
of c and l , but they wont affect choices of L and A .