Question

WA 1 Thinking LIke an Economist. DUE: February 9

Writing Assignment 1: Thinking LIke an Economist. DUE: February 9.

Key objective: designing framework for business decision-making with the opportunity cost and the marginal cost consideration.

Setting: You are one of a few co-owners of a commercial space of 50,000 sq. ft. in the building in downtown of your selected town in the State of NY (please name it up front in your assignment). You have to come to a common decision like economists what to do with it now. Some of you run own private single-owned businesses and might find this space useful for your own purpose. So far, you have invested $20,000.00 in the renovation of the building. You have to motivate your decision based on the principles of economics.

Instruction: Have in mind current market conditions. Use formal language and correct terminology in your discussion of relevant economic concepts, and apply relevant economic tools for problem solving in this real-life imitating simulation. As there might be differences in opinions please support your proposal in the assignment with supporting data and include also one-page memo presenting the summary of your recommendation, the way of your thinking adopted, and the decision to be agreed upon. Some extra research would be helpful. You can adopt a real or a mock example if want to work with more details.

Outline: Consider and discuss in the assignment, the issues in your decision making process, such as:

• assumptions • trade-offs, values and incentives • rational choice • marginal changes • sunk costs • opportunity cost • factors of production • market forces: demand and supply, market equilibrium • possible externalities • economic variables that can influence your choice • business cycle • please apply economic models.

Answer 1

Let's suppose I'm co-owner of a $50000 sq ft commercial space in downtown NY. Let's call it Xspace.

As an economist, we need to be aware of the opportunity cost attached to any investment. We can open a privately-owned business and use it for our own purposes.

We've invested $20000 in the renovation of the building. Total Cost is $50000+$20000 = $70000

Let's say you want to weight the alternatives. Using the basic Cost-Benefit Analysis technique, you'll only invest in the option which gives you the net present return amounting more than $70000. Let's say the prevailing interest rate is 10% (which captures the opportunity cost in economic sense). We need to use NPV criterion to check whether our return with some other investment will outweigh the cost. Any rational choice maker won't be giving out this Xspace to others if the given stream of income from this falls short of the total cost.

Note, you need to be aware of the trade-offs present in such scenarios. Assuming market conditions to be stable and current government is stable in a way to assure that 10% return attached to your investment.

You also need to assess the demand for real estate in order to rent your plot. In some cases, if demand is low then we might feel the Xspace to be a sunk cost type investment. Pricing mechanism should also take care of the externalities that might lead to undervaluation or overvaluation of your Xspace.