lectur8-page30

lectur8-page30 - leading to maximum net revenues. Money...

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What is the opportunity cost of feeding farm raised grain to hogs? The true cost of using corn as feed is $3.50 / bushel, which is roughly the opportunity cost. If you answered “at least $3.50 per bushel” you are correct. What the corn cost you to produce is not relevant. The corn is currently worth $3.50 per bushel, and that is what you will give up if you put that corn in the stomach of a porcine. I hope we recognize our old friend, opportunity cost. If we used $2.50 per bushel to determine the cost of corn, we would overstate the profitability of the swine enterprise (or understate the loss). That may lead us to making a mistake concerning the most efficient allocation of resources
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Unformatted text preview: leading to maximum net revenues. Money that has already been spent, cost that have already been incurred are referred to as sunk costs. Sunk costs are not relevant for making future decisions. Only the costs in which we still have control are relevant for future decision making. The $2.50 per bushel is gone. The corn is worth $3.50 per bushel in my hand. Do I sell it for $3.50 per bushel, or do I use it as an input in the swine operation to enhance profits? If I sell the corn, I make $1.00 per bushel. If I feed the corn to hogs, will I earn more or less than $1.00 per bushel? That is the logic behind this analysis....
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This note was uploaded on 12/29/2011 for the course ECO 210 taught by Professor Malls during the Fall '10 term at SUNY Stony Brook.

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