Question

Jayden is a mushroom farmer. He invests all his spare cash in additional mushrooms which grow on otherwise useless land behind his barn. The mushrooms double in weight during the first year, after which they are harvested and sold at a constant price per pound. Jayden's friend Isabella asks Jayden for a loan of $200, which she promises to repay after one year. (a) If the land is useless except for growing mushrooms, what is the opportunity cost of using the land to grow mushrooms? Explain. (b) Assume that if Jayden buys $200 worth of mushrooms that he can buy 100 pounds of mushrooms, paying a price of $2 a pound. After one year how many pounds of mushrooms will he have? Explain. (c) How much will he sell the mushrooms for? Explain. (d) How much interest will Jayden charge Isabella if Jayden wants to recover the opportunity cost of making the loan? Explain. (e) Give one example of some change in the world that would cause Jayden's opportunity cost to go down (which would then cause the interest Jayden charges to also go down).

Answer 1

.(a) If the land is useless except for growing mushrooms, opportunity cost of using the land to grow mushrooms:

Opportunity cost is the amount of gain foregone for selecting an alternative.

For example a business owns a building. If it uses the building for its business, opportunity cost of business is the amount it it would have received by renting it.

Suppose you own a land to be used for a factory. Opportunity cost of setting up the factory is the market value of the land.

If there is no alternative use or no gain by any other means with the resources, there is no opportunity cost.

In this case, opportunity cost of using the land to grow mushrooms: ZERO

.(b) Amount of mushrooms bought=100pounds

After one year the mushrooms will double the weight.

Hence, he will have(100*2)=200 pounds of mushrooms

.(c) He will sell the mushroom for $2*200=$400

.(d) Jayden will charge interest of (400-200)=$200

.(e) Opportunity cost and consequently interest charge will go down if the price of mushroom decreases after one year.(If the price is less than $2 per pound)