Investment and Disinvestment Principles with Nonconstant Prices and Varying Firm Size Applied to Beef‐Breeding Herds

Abstract

Abstract Variable beef‐breeding herd sizes are found to be optimal given cyclical beef prices. Traditional replacement theory does not allow variable firm size because unequal investment (replacement) and disinvestment (culling) rates are not possible. If firm size changes, cost of production per unit endogenously changes given a u‐shaped cost curve. Optimal investment and disinvestment rules for variable firm size are developed based upon the firm's cost curve and discounted net revenue flows for a finite rolling planning horizon. Current and future investment and disinvestment decisions are linked by their mutual effect on firm size and hence production cost per unit.