Negative Milk Supply Response Under Constrained Profit Maximizing Behavior

Abstract

A conceptual model is formulated that shows that a downward sloping supply function may exist for a profit maximizing firm facing a cash-flow constraint. The necessary requirement is that at least one factor must be a non-cash input. The model is tested using analysis of variance on two groups of producers from farm record data, one group facing a binding budget constraint the other group not. The results indicate that farms facing a cash flow constraint increase output more than farms not restricted by a cash flow constraint in response to a price decrease.

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