Question

Suppose a farmer is planning to grow cabbages on his land. The cost of growing cabbages is \(£ 50\) per acre and he earns \(£ 100\) from the produce in the market. There is another option for him, to grow pumpkins, which could yield him \(£ 110\) if he spent \(£ 70\) on it. (a) What is the opportunity cost of growing cabbages? Is it rational for the farmer to grow cabbages instead of pumpkins? (c) Suppose the only other option for him to earn from his farmland is to rent it to another farmer. How will the farmer arrive at a rational decision?

Short answer

The opportunity cost of cabbages is £40; growing cabbages is rational unless renting offers more than £50.

Step-by-step solution

Understand the Cost Components

The farmer incurs a cost of £50 per acre to grow cabbages and earns £100 from it in the market. Similarly, for growing pumpkins, the cost is £70 per acre, and it yields £110.

Calculate Opportunity Cost of Cabbages

The opportunity cost of an action is the benefit foregone by not choosing the next best alternative. Here, the opportunity cost of growing cabbages is the net gain from not growing pumpkins. To calculate this, subtract the cost from revenue: For cabbages, net gain = £100 (earned) - £50 (spent) = £50. For pumpkins, net gain = £110 (earned) - £70 (spent) = £40. Therefore, the opportunity cost of growing cabbages is £40, the net gain from pumpkins.

Evaluate Rationality of Growing Cabbages

Compare the net gains: Growing cabbages yields a net gain of £50, while growing pumpkins yields £40. Since £50 > £40, it is rational for the farmer to grow cabbages under the given options.

Consider Renting as an Option

The farmer needs another evaluation regarding renting the land. If renting the land offers a gain greater than £50 per acre, it may surpass the current best option (growing cabbages). If renting yields less, then growing cabbages remains the rational choice.

Arrive at a Rational Decision

The farmer should choose the option that gives the highest net gain per acre. He should calculate the renting income and compare it with the net gains of growing cabbages and pumpkins. Choosing the highest income option will ensure a rational decision.

Key concepts

Cost-Benefit Analysis

When making decisions, it is crucial to evaluate both the costs and the benefits involved. This is where "cost-benefit analysis" comes in. Essentially, it involves comparing the total expected costs against the total expected benefits of one option over another.

In the context of our farmer, the costs of growing cabbages are £50, and the earnings are £100. But to understand the real gain, we subtract the cost from the earnings, resulting in a net gain of £50. Contrastingly, for pumpkins, spending £70 brings in £110, leading to a net gain of £40. Therefore, even if pumpkins offer higher earnings, cabbages provide a better net gain.

Understanding these differences helps the farmer make informed decisions. By evaluating which option brings more benefit relative to the cost, the farmer can maximize his profit. This logical evaluation ensures decisions result in the highest possible benefits for the resources used.

Agricultural Economics

Agricultural economics is a branch of economics dealing with agricultural production, resource management, and decision-making in farming. It looks at how farmers can allocate their resources efficiently to maximize their outputs or gains.

The farmer in our scenario is faced with the choice between growing cabbages and pumpkins. His decision lies within agricultural economics because he is allocating resources (like land and labor) to agricultural production. By calculating the net gains of each option, he is engaging in efficient resource management.

Additionally, agricultural economics often considers alternative uses of land, such as renting. If a farmer can earn more by renting than by producing, it could signal a better use of land resources. This analytical approach is what allows farmers to thrive economically by choosing the most profitable use of their resources.

Decision Making in Economics

Making economic decisions involves evaluating various options and selecting the one that maximizes satisfaction and profit. In economics, decision-making relies heavily on analysis and understanding of opportunity costs.

The farmer's choice, whether to grow cabbages, pumpkins, or rent the land, is an example of economic decision-making. He must decide based on the opportunity cost, which is what he sacrifices for not taking the next best alternative. His opportunity cost of choosing cabbages is the net gain he foregoes from pumpkins, which is £40.

The rational decision is guided by comparing these calculated net gains. If a new option, like renting, presents a higher net income than £50 (from cabbages), it could shift this decision. Decision-making in economics thus ensures resources are not wasted but rather allocated for the greatest economic benefit.