SIXTH EDITION MANAGERIAL

ECONOMICS

AND ORGANIZATIONAL ARCHITECTURE

ANALYZING MANAGERIAL DECISIONS: Leaving New York City for the Farmlands of Illinois

You have worked as an investment banker in New York and Hong Kong for the last five years. You are tired of living in populated cities and yearn for a more peaceful environment.

The Wall Street Journal contained a story about the federal government's actions to increase corn- based ethanol as a substitute for gasoline in the United States. According to reports, new laws and regulations will result in the construction of hundreds of new ethanol factories over the next decade. De- mand for corn to fuel the plants is expected to soar.

Based on a Web search, you found 80 acres of prime farmland for sale in Illinois at a price of $10,000 per acre. You have saved enough from your past bonuses to purchase the land. You are tempted to quit your job and purchase the land to farm corn.

Several colleagues have told you that it sounds like a good idea. They say that not only would it allow you to move to a less populated area, but it is a great business opportunity with little risk. Surely the price of farmland will increase dramatically over the next few years as the ethanol plants begin operation and the demand for corn skyrockets. Good farmland is limited, and you might reason- ably expect its price to double or even triple over the next few years. You are smart and should be able to learn the farm business very quickly. In ad- dition, you will have a cost advantage over farmers who wait to buy land at much higher prices. If you decide that you do not want to be a farmer, you can always sell the land at a "huge profit." Do you think your colleagues are giving you good advice? Explain.