IV. Net Incomes 



Net income as used in this study refers to the income net of 

 variable costs of production. Variable costs are purchased feed, seed, 

 fertilizer, dairy supplies, electricity, gasoline, oil, hired labor, use 

 depreciation of machinery and interest on capital used in production. 



Net income thus defined is the residual amount left for covering 

 fixed costs, such as interest on fixed capital, depreciation of buildings 

 and machinery, insurance, taxes, and return to operator's labor and 

 management. By maximizing the net income, one also maximizes 

 residual return to the operators labor and management since the 

 other costs are fixed in the time period under consideration. 



Net Income Functions 



Figures 3, 4, and 5 compare net income functions for three milk 

 prices; and 6, 7, and 8 compare net income functions for three milk 

 responses. These net income functions show the income effects of 

 adding more cows to a fixed acreage of cropland. 



At the point at which hay sales become profitable, each net 

 income function separates into two values. The higher function 

 representing solutions in which hay was sold, is graphed from ten 

 cows to the maximum net income attainable. The lower function, 

 representing solutions in which hay sales were not allowed, is graphed 

 from twenty cows to the maximum. The slopes of each of the net 

 incomes functions decrease as more cows producing at the optimum 

 on their milk response function are added to the fixed acreage. This 

 indicates diminishing returns from adding resources to a fixed 

 acreage. 



Observation of figures 3, 4, and 5 shows that milk price has three 

 distinct effects: 



(1) A higher milk price raises the position of the net income 

 function by a substantial amount; 



(2) A higher milk price substantially increases the number of 

 cows kept at the point of maximum net income; 



(3) A higher milk price increases the slope of the net income 

 function slightly. 



These three effects are present with the milk response functions 

 for each quality of cows, but are accentuated in the medium and low 

 milk response functions. 



Observing figures 6, 7, and 8 shows that the milk response 

 function exerts influences similar to those of milk price, with the 

 income response functions for high quality cows having steeper 

 slopes. 



The net income functions illustrate that farms with low quality 

 cows and a low milk price cannot improve their incomes very much 

 by adding cows. Farms with medium or high quality cows fare some- 

 what better under a low milk price; however, they do not have the 



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