Question

You are employed by a firm like Adams Land and Cattle Company, a huge cattle feedlot in Nebraska with a capacity of 85,000 to 90,000 head of cattle. Cattle on feedlots are fed diets that are heavy in barley: one steer eats more than 8 pounds of barley per day. Suppose that your firm feeds your cattle 200 tons of barley per day and has a stockpile of 4,000 tons of barley for which it paid $250 per ton.

Suppose the current price of barley is $300 per ton.

Your company's opportunity cost per day of feeding all its cattle will be?

Suppose the current price of barley is $200 per ton.

Your company's opportunity cost per day of feeding all its cattle will be?

Which of the following statements describe why the opportunity costs are different in the above two cases?

Answer 1

Opportunity cost is the benefit foregone by choosing one alternative over another. In this case, opportunity cost of feeding all cattle is the amount of money I could earn by selling the equivalent stockpiled barley.

(1) When price is $300 per ton,

Opportunity cost = 200 x $(300 - 250) = 200 x $50 = $10,000

(2) When price is $200 per ton,

Opportunity cost = 200 x $(200 - 250) = 200 x (-$50) = - $10,000

Note: For the last part, Options are not available.