The weak axiom of profit maximization is a nonparametric, empirical approach that has been used in the United States to analyze dairy farmers’ production and profit behavior under input and output price changes to determine whether farmers effectively respond to these changes. The expectation is that profit calculated using the current year’s input and output combination will be greater than that calculated from the previous year’s combination with current prices more often than due to chance. This approach was replicated using New Zealand dairy farm data (1,785 pairs of records over five years). Current year’s profits were significantly greater in two of the years and less in two years and in total. New Zealand’s pasture-based systems mean that this approach has limitations in evaluating farmers’ input and output decisions in response to price changes. Factors such as climatic impacts on pasture availability (a volatile input not included in the data set), and hence purchased feed requirements, affected the results. Farmer responses to costs and prices were not readily differentiated from other factors that affected input decisions or output. Results were interpreted with respect to climate, production, and income and cost changes, both nationally and regionally, with some interesting observations on farmer responses to variability.
Dooley, Anne E.; Shadbolt, Nicola M.; Khatami, Koohyar; and Tauer, Loren W.
"Application of the Adjusted Weak Axiom of Profit Maximization to New Zealand Dairy Farming,"
Journal of Applied Farm Economics: Vol. 1
Available at: https://docs.lib.purdue.edu/jafe/vol1/iss2/4