Farmer responses to changing risk aversion, enterprise variability and resource endowments
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The focus of this article is on assessing how risk aversion, enterprise variability and
resource endowments affect farm land-use decisions and economic returns. A
theoretical model of a two-enterprise, two-constraint farm is developed, and then,
an empirical illustration for an Australian farm is provided. The methodology used
builds on previous expected mean-variance (EV) models by incorporating land and
budget constraints. The Kuhn–Tucker conditions of the EV model are examined to
highlight that changes in resource endowments have larger effects on economic
returns, than do changes in risk aversion or enterprise gross margin variability. It was
also found that combinations of enterprise mixes that do not use all available
resources can produce higher economic returns, relative to some enterprise mixes that
use all available resources.