PPT5.ACE232.09

# PPT5.ACE232.09 - Grain \$04.4/lb x 56 = \$2.46/bu Hay \$.03/lb...

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1 Grain: \$04.4/lb x 56 = \$2.46/bu Hay: \$.03/lb = \$1.80/60#bale; \$600/ton As you move from Ration A to Ration G, you use more grain and less hay. +75 lb -220 lb +75 lb -195 lb +75 lb -165 lb +75 lb -145 lb +75 lb -100 lb +75 lb - 80 lb = 220 75 = 165 75 = 80 75 CONSTANT DECREASING = .044 .03 TOTAL COST \$76.80 \$73.50 \$70.95 \$69.30 \$68.25 \$68.55 \$69.45 DECISION RULE: Go to the last combination where the substitution ratio is greater than the price ratio Where the substitution ratio is greater than the price ratio, the total cost can be reduced by moving to the next ration

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2 Note that: This all depends on both the substitution ratio and the price ratio The substitution ratio is fixed and is a result of physical and biological processes The price ratio however may change and so a different input combo will become the least cost choice
3 Also… Table 8-1 showed a decreasing substitution ratio, which is the most common in ag With a decreasing substitution ratio, the least cost ratio will include some of both inputs But with constant substitution ratio, you’d have all of one input or the other

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