Analyzing Froeb's 'One Lesson Of Business'
5. In Chapter 2, Froeb explains that the "One Lesson of Business" is that, "Wealth is created when assets move from lower to higher-valued uses." (p.12) Froeb goes on to spend most of the chapter talking about how taxation destroys wealth and that government subsidies (and all government spending is a subsity) also destroys wealth. Apply Froeb's "one lesson of business” to a specific government tax-and-spend decision that you support or else use the "one lesson of business” to explain why you are an anarchist.
A1) If you are not an anarchist, then explain how the government creates wealth by taxing-and-spending to produce some program somewhere that you support. Why do you think that the tax dollars are worth less to taxpayers than the value of the government program you selected? This can't be a zero-sum game that happens to benefit you personally. The "One Lesson of Business" is about wealth creation. For example, I can't simply defend Medicare …show more content…
because I like that it pays for my mother's healthcare. That doesn't explain whether Medicare creates wealth. I would need to justify whether Medicare's total benefits to society are greater than its cost to society. If government doesn't create value somewhere, then we would be better off without it and we should be anarchists.
A2) If you are an anarchist, then explain why all taxation and government spending (subsidies) should be eliminated. In particular, you should take on the biggest spending programs of government: defense, healthcare (mostly Medicare), pensions (mostly Social Security), and education. These programs account for over 2/3 of total government spending (including state and local government), so if you are an anarchist, you should focus on where most of the money goes.
6. Froeb says that businesses that are less bureaucratic and more free-market will be more successful. For example, on page 16, Froeb says that, "Organizations impose 'taxes,' 'subsidies,' and 'price controls' within their companies that lead to unprofitable decisions." Pick one of the following questions and indicate whether you have chosen to address X or Y:
X) How do corporations and other organizations "tax" the individuals, divisions, and/pr departments within the organization? Give a specific example. Do not use any government mandated taxes as your example. Would the organization be better off if it completely avoided the kind of 'taxation' in your example?
Y) How do organizations impose "price controls"? Give an example where a bureaucrat (manager) imposes a price control (a pre-determined, fixed price) upon the people in the organization. Explain whether it is better to eliminate this particular price control.
7. Suppose you have capital that is currently worth $1,000 and your cost of capital (WACC) is 10%/year. How much operating profit per year would you need to earn to be generating economic value by staying in business according to EVA?
8. Think of a specific example outside of the textbook where someone in an organization (team, school, business, government, etc.) made a bad decision and use Froeb's rational actor paradigm to diagnose the problem.
A) What is the problem (very briefly)?
B) What caused the bad decision?
C) How could you fix the problem? Could anyone change the organizational structure, information, incentives, (or culture)? How well would your proposed change solve the problem?
9. You traveled to Memphis over the weekend but need to return to work in Columbus early Monday morning. On Sunday afternoon, your flight is postponed until Monday night due to hurricane Ike. Since this is a pleasure trip, you bought a non-refundable ticket for $250. You can still get a ticket on a Greyhound bus for $90 and still get home by 6:00am. Under what circumstances should you buy the Greyhound ticket and "ride the dog" overnight?
10. You are the production manager for Widgets, Inc. Current production is 1,000 widgets and all have been ordered by your regular customers. The phone rings and a new customer wants to buy 1 more widget and offers you $1,000 if you increase production to 1,001 widgets. Should you accept this offer? Remember that it is often harder to make decisions if you just try to estimate the cost than if you figure out the total profit. You do not need to know what the other customers paid.
Below are your average total cost which is the total cost divided by the quantity of widgets.
Quantity
Average Total Cost
Current Production
1,000
$200
Make One More?
1,001
$201
A) What is the marginal revenue of selling one more?
B) What is the total cost currently (selling 1000 units)
C) What would the total cost be if you sell 1001 units?
D) What is the marginal cost of producing the 1001st widget?
E) What do you tell the new customer?
11. A) Your firm received an RFP (request for proposal) on a wire harness from GM that will require an investment with fixed costs of $1 million and a constant marginal cost per unit of $1 with expected sales of 1 million units. What is the break-even price per unit that you will need to quote in order to avoid losing money?
B) GM agrees to the price you quoted, and then hands you with a PO (purchase order) for 0.5 million units, what do you say? Why?
12. You have fixed costs of $100/year, and you can produce and sell 100 units per year but you sell a commodity, so you are at the mercy of the going market price and you cannot raise your price above whatever price the market is currently at. Your marginal cost is $5. If the market price declines, what is your break-even price below which you will shut down? Note that there are two different answers for two different possible scenarios. Give both possible answers for full credit.
Don't worry about the opportunity cost of capital (WACC). Assume that that is included within the fixed cost figure.
13. Suppose there are two technologies for producing pizzas in Mozambique. The solar oven requires $100 in fixed costs, but $9 in marginal costs versus the electric oven which requires $50 in fixed costs but $10 in marginal costs due to the high cost of electricity. What quantity of production will make you indifferent between the two different technologies? This is useful because in making capital expenditure decisions there is often this tradeoff and finding the break-even quantity helps strategize about which investment will be most profitable. The idea is that for small quantities one technology will have higher total costs and for large quantities the other technology will have higher total costs. Your job is to see what quantity makes you indifferent between the two technologies because they have the same total cost.
[Hint: There are several ways to solve the problem. 1. You can use the algebraic method given in the text example on pages 48-49. 2. you could put the numbers into Excel and make a table that displays the costs of the two technologies for a wide range of quantities. 3. You could use Excel's Goal Seek (or Solver) to find the answer by subtracting the costs from each other and asking Goal Seek to vary the quantity in order to bring the difference in costs to zero.]
14.
You currently pay $5,000 per year in rent to a landlord for an office that you are considering purchasing for $100,000. You can qualify for a loan of $80,000 at 5% and you would need to make a $20,000 down payment on the office. To raise money for the down payment you would have to liquidate a safe investment that earns a steady 6% return. You can only use the loan money for buying the office, but you can always invest your own savings and earn 6% return. Neglect all other concerns (assume zero closing costs, capital gains, inflation, and taxes), and determine whether it is better to rent or own. Explain your calculations. There are numerous ways to do calculations that will get you the answer but two common techniques are to 1) calculate the cost of capital to rent and compare with the cost to own or 2) calculate what you would have at the end of a period of renting vs. what you would have after paying a mortgage for the same period. You can attach a spreadsheet if that helps you show your
work.
A1) If you are not an anarchist, then explain how the government creates wealth by taxing-and-spending to produce some program somewhere that you support. Why do you think that the tax dollars are worth less to taxpayers than the value of the government program you selected? This can't be a zero-sum game that happens to benefit you personally. The "One Lesson of Business" is about wealth creation. For example, I can't simply defend Medicare …show more content…
because I like that it pays for my mother's healthcare. That doesn't explain whether Medicare creates wealth. I would need to justify whether Medicare's total benefits to society are greater than its cost to society. If government doesn't create value somewhere, then we would be better off without it and we should be anarchists.
A2) If you are an anarchist, then explain why all taxation and government spending (subsidies) should be eliminated. In particular, you should take on the biggest spending programs of government: defense, healthcare (mostly Medicare), pensions (mostly Social Security), and education. These programs account for over 2/3 of total government spending (including state and local government), so if you are an anarchist, you should focus on where most of the money goes.
6. Froeb says that businesses that are less bureaucratic and more free-market will be more successful. For example, on page 16, Froeb says that, "Organizations impose 'taxes,' 'subsidies,' and 'price controls' within their companies that lead to unprofitable decisions." Pick one of the following questions and indicate whether you have chosen to address X or Y:
X) How do corporations and other organizations "tax" the individuals, divisions, and/pr departments within the organization? Give a specific example. Do not use any government mandated taxes as your example. Would the organization be better off if it completely avoided the kind of 'taxation' in your example?
Y) How do organizations impose "price controls"? Give an example where a bureaucrat (manager) imposes a price control (a pre-determined, fixed price) upon the people in the organization. Explain whether it is better to eliminate this particular price control.
7. Suppose you have capital that is currently worth $1,000 and your cost of capital (WACC) is 10%/year. How much operating profit per year would you need to earn to be generating economic value by staying in business according to EVA?
8. Think of a specific example outside of the textbook where someone in an organization (team, school, business, government, etc.) made a bad decision and use Froeb's rational actor paradigm to diagnose the problem.
A) What is the problem (very briefly)?
B) What caused the bad decision?
C) How could you fix the problem? Could anyone change the organizational structure, information, incentives, (or culture)? How well would your proposed change solve the problem?
9. You traveled to Memphis over the weekend but need to return to work in Columbus early Monday morning. On Sunday afternoon, your flight is postponed until Monday night due to hurricane Ike. Since this is a pleasure trip, you bought a non-refundable ticket for $250. You can still get a ticket on a Greyhound bus for $90 and still get home by 6:00am. Under what circumstances should you buy the Greyhound ticket and "ride the dog" overnight?
10. You are the production manager for Widgets, Inc. Current production is 1,000 widgets and all have been ordered by your regular customers. The phone rings and a new customer wants to buy 1 more widget and offers you $1,000 if you increase production to 1,001 widgets. Should you accept this offer? Remember that it is often harder to make decisions if you just try to estimate the cost than if you figure out the total profit. You do not need to know what the other customers paid.
Below are your average total cost which is the total cost divided by the quantity of widgets.
Quantity
Average Total Cost
Current Production
1,000
$200
Make One More?
1,001
$201
A) What is the marginal revenue of selling one more?
B) What is the total cost currently (selling 1000 units)
C) What would the total cost be if you sell 1001 units?
D) What is the marginal cost of producing the 1001st widget?
E) What do you tell the new customer?
11. A) Your firm received an RFP (request for proposal) on a wire harness from GM that will require an investment with fixed costs of $1 million and a constant marginal cost per unit of $1 with expected sales of 1 million units. What is the break-even price per unit that you will need to quote in order to avoid losing money?
B) GM agrees to the price you quoted, and then hands you with a PO (purchase order) for 0.5 million units, what do you say? Why?
12. You have fixed costs of $100/year, and you can produce and sell 100 units per year but you sell a commodity, so you are at the mercy of the going market price and you cannot raise your price above whatever price the market is currently at. Your marginal cost is $5. If the market price declines, what is your break-even price below which you will shut down? Note that there are two different answers for two different possible scenarios. Give both possible answers for full credit.
Don't worry about the opportunity cost of capital (WACC). Assume that that is included within the fixed cost figure.
13. Suppose there are two technologies for producing pizzas in Mozambique. The solar oven requires $100 in fixed costs, but $9 in marginal costs versus the electric oven which requires $50 in fixed costs but $10 in marginal costs due to the high cost of electricity. What quantity of production will make you indifferent between the two different technologies? This is useful because in making capital expenditure decisions there is often this tradeoff and finding the break-even quantity helps strategize about which investment will be most profitable. The idea is that for small quantities one technology will have higher total costs and for large quantities the other technology will have higher total costs. Your job is to see what quantity makes you indifferent between the two technologies because they have the same total cost.
[Hint: There are several ways to solve the problem. 1. You can use the algebraic method given in the text example on pages 48-49. 2. you could put the numbers into Excel and make a table that displays the costs of the two technologies for a wide range of quantities. 3. You could use Excel's Goal Seek (or Solver) to find the answer by subtracting the costs from each other and asking Goal Seek to vary the quantity in order to bring the difference in costs to zero.]
14.
You currently pay $5,000 per year in rent to a landlord for an office that you are considering purchasing for $100,000. You can qualify for a loan of $80,000 at 5% and you would need to make a $20,000 down payment on the office. To raise money for the down payment you would have to liquidate a safe investment that earns a steady 6% return. You can only use the loan money for buying the office, but you can always invest your own savings and earn 6% return. Neglect all other concerns (assume zero closing costs, capital gains, inflation, and taxes), and determine whether it is better to rent or own. Explain your calculations. There are numerous ways to do calculations that will get you the answer but two common techniques are to 1) calculate the cost of capital to rent and compare with the cost to own or 2) calculate what you would have at the end of a period of renting vs. what you would have after paying a mortgage for the same period. You can attach a spreadsheet if that helps you show your
work.