Question

You are the manager of a medium-sized farm with 100 acres of workable land. You can farm the land yourself, rent the land using a triple net lease to another farmer for $2,000 per acre, or sell the land to a developer for $40,000 per acre. You have an investment opportunity that pays a return of 6 percent a year. What is your opportunity cost for a year if you decide to farm the land yourself?

Answer 1

Opportunity cost is defined as the profit , that could have been possible , from the second next best use of the resource .

So three uses

1) farm land

2) rent to another farmer

Total income = 2000*100

= 200,000

Return from investment = .06*200,000

= 12,000

3) sell the land

Total income = 40,000*100

= 4000,000

As return possible from investment= 6%

Total income from investment in a year = .06*4000,000

= 240,000

so income forgiven per year, if it is decided to farm the land

= Second best use of resource

= $ 240,000 : opportunity cost