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Theoretical and Empirical Problems in Modeling Optimal Replacement of Farm Machines

Published online by Cambridge University Press:  28 April 2015

Garnett Bradford  and
Donald Reid
Garnett Bradford
Affiliation:
University of Kentucky, Lexington
Donald Reid
Affiliation:
University of Kentucky, Lexington
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Extract

Research on the optimal replacement problem has emphasized specification of the theoretically appropriate criterion. Today, the most commonly applied replacement decision theory for machinery assumes that the owner will replace each older machine, “defender,” with an identical new machine, “challenger,” in accordance with long-run cost minimizing or profit maximizing criteria (i.e., wealth maximization). Perrin (p. 60) summarizes the cost minimization criterion which should be applied: “A machine should be kept another period if the marginal costs of retaining it … are less than the ‘average’ periodic costs of a replacement machine.” As Chisholm noted, this criterion is “deceptively simple.” Support for Chisholm's observation is evidenced throughout the literature, because acceptance and use of an appropriate criterion has come about slowly.

Type
Research Article
Information
Journal of Agricultural and Applied Economics , Volume 14 , Issue 1 , July 1982 , pp. 109 - 116
Copyright
Copyright © Southern Agricultural Economics Association 1982

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