Executives at Leonesse Cellars a premium winery in Southern

Executives at Leonesse? Cellars, a premium winery in Southern? California, were surprised to learn that shipping wine by sea to some cities in Asia was less expensive than sending it to the East Coast of the United? States, so they started shipping to Asia.

?Source: (David? Armstrong, \"Discount Cargo Rates Ripe for the? Taking,\" San Francisco? Chronicle, August? 28, 2005).

Because of the large U.S. trade imbalance with major Asian? nations, cargo ships arrive at West Coast seaports fully loaded but return to Asia half to completely empty. Use the concept of opportunity cost to help explain the differential shipping rates.

Shipping wine to Asia is less expensive than transporting wine to the East Coast because

A. the incremental cost of another shipment to Asia is decreasing.

B. the value of the next best use of ships from the West Coast to Asia is low.

C. the price a shipping firm could have earned by transporting other cargo is high.

D. the cost of ships in sea transportation is a sunk cost.

E. the value of wine to consumers in Asia is higher than on the East Coast.

Solution

B. the value of the next best use of ships from the West Coast to Asia is low.

Here the opportunity cost of usage of cargo ships is low because the Cargo Ships that go back to Asia from the seaports of West coast are either half empty or completely empty, that means if the wines are not sent in them there isnt any next best use of that space, it will remain empty. Cargo Owners will be willing to give that space at a much lower cost to the winery to export the wines to Asia because if they dont give it, the space still remains empty, there no next best usage of the space on the cargo ship.