Questions
The word “Investment” carries with it many definitions. In this course, it represents ‘Business Spending’----businesses spending...

The word “Investment” carries with it many definitions. In this course, it represents ‘Business Spending’----businesses spending money hiring workers to BUILD! The three areas of Business Spending can be broken down into: 1. new plant and equipment construction volume (new factory construction) 2. New residential construction volume and sales volume and 3. “new”----net additions to (or subtraction from) inventories. Inventories are often broken down into three areas: raw materials inventories, ‘work in process’ and finished product inventories (visualize new cars sitting in the dealership on Capitol Expressway). New plant and equipment inventories make up about two thirds of the total. Visualize a company owning and operating four factories that mass produce shoes: the yearly maintenance of the four factories can be called ‘replacement’ Investment. The construction of a new, 5th factory can be called ‘net’ Investment. One of the most, if not THE most high profile example of a new factory is the Tesla battery factory outside Sparks, Nevada. Let’s say a shoe company is mass producing shoes out of each of its four factories, each capable of producing 1 million pairs. Let’s say that the price per pair the firm sees (wholesale) is $30, and the cost per pair is $27. The price per pair is set by market conditions—the Demand Curve for the shoes. The firm earns a profit of $3 per pair for every pair produced, distributed and sold (the retailer will mark up the price to the customer). The driving force behind the firm’s decision to build “Factory #5”---the “green light”---is the idea that the firm enjoys a sales volume that is high, and rising, and expected to rise further in the future. The new factory will most likely result in a dramatic drop in the cost per pair owing to gains from new technology, yet the new extra shoes MUST BE SOLD to customers. The concept that the firm’s sales volume must be high and rising and expected to rise in the future can be restated as the firm’s ‘excess capacity’ must be low and dropping and expected to drop further in the future---in short, the firm’s sales volume, in theory, should be expected to ‘bust through’ or exceed the firm’s current capacity. This firm’s decision to build ‘Factory #5’ is perhaps the most important decision the firm will make in the next year or two. In theory, it is an “all or nothing” decision---let’s say the firm will spend $100 million to build the factory, or spend zero on this project. A ‘healthy’ firm that wants to expand may have two projects but may only obtain funding for one, or four projects and may only be able to obtain funding for two—owing to the fact that the supply of loanable funds, and equity funding, is finite and this firm will be competing with other firms for essentially the “same” funding. Once we make the decision to proceed---the ‘green light’---then we must line up FINANCING---where and how will we obtain $100million for our project, which will start on Jan 2 of next year and run until Dec 31 of that year? Profits, also known as retained earnings, are often the most important factor. Let’s say that we have earned $30 million in retained earnings, and we wish to borrow the other $70 million (let’s make it 75 million owing to possible cost overruns). We will apply for a loan from some financial institution, where the decision making body (we can call it a ‘loan committee’) is considering 10 loan applications, and will accept 5 and deny 5. We may have to ‘beat out’ a rival firm, who has their own great idea and their own grand plans for their own factory #5, but have $20 million saved in retained earnings and wish and need to borrow $80 million. The concept of a ‘shortage’ of funds suggests that we must appear a ‘stronger’ candidate for the financing than our rival. Sad but true. Let’s say we are in a position to “beat out” our rival for the loan money. We base our entire business model that the shoes mass produced by our new factory will cost, say, $27 per pair (we can revise this later) on certain assumptions about the cost of the land, labor, raw materials, plant and equipment needed to build the factory along with the projected cost of compliance involving government regulations (a big cost when it comes to building a house) and INTEREST PAYMENTS ON BORROWED MONEY! Let’s say that we are planning to borrow $70 million at an interest rate of 10% for yearly interest-only payments of $7 million per year. Let’s say that the interest rates on a loan like this in March of 1979 hovered in the range of 10%. From March 1979 to March 1980 the Federal Reserve pursued a ‘contractionary’ monetary policy that resulted in interest rates rising to roughly 20% ( about 18% for a home loan). The same loan committee that approved 5 and denied 5 of every ten loan applications will now approve 4 and deny 6. We saw one of the largest drops in new plant and equipment construction since the Great Depression. We could in theory raise money by issuing new equity securities (the ‘IPO’ is a prominent example) but this is less likely in an environment where liquidity is drying up, and interest rates are high or rising or both. It is not surprising that a drop in stock market values precedes a recession by a few months (the 2008-2009 recession is an example). Let’s assume that we have our own internal ‘green light’ and we have somehow obtained the needed financing---two hurdles overcome. Now, the great decision is: WHERE DO WE BUILD? Here, in the U.S.? Or in some other country? If we build on U.S. soil then the bulk of the construction costs will be counted as part of our Investment spending and part of the equation Total Spending=C+I+G+(X-M)
- Let’s say that we have a hypothetical firm operating four factories, each with the capacity to produce 1 million pairs of shoes. We have established that in order to build ‘Factory #5” it must 1. give itself the “green light”---sales volume must be high and rising and expected to rise further in the future---a necessary but not sufficient condition and 2. Raise the funding! Let’s say $100 million BEFORE WE BREAK GROUND ---our factory would be quite small --- Tesla is reported to be spending up to $5 billion for its battery plant outside Sparks. Factors involving raising the $100 million include: Profits, the higher the better, of course, but many firms will be required to spend money they do not have, in order to build factory #5, thus they must access financing through financial and capital markets, either through debt financing (borrowing the money) or equity financing (issuing new shares of equity securities). The fact that the supply of money in the financial and capital markets is FINITE is CENTRAL to the entire field of Macroeconomics! OKAY! We have the green light, and we have the financing! WHERE DO WE BUILD OUR FACTORY? In the U.S.? Or in another country? If we build in the U.S., then the ‘lion’s share’ of the $100 million will be part of the ‘Total Spending = C+I+G+X-M equation. If we build in another country, then very little of the $100 million will be spent on U.S. products and services, at least in theory. REASONS TO BUILD IN ANOTHER COUNTRY: 1. LABOR COSTS! A factory worker in the U.S. may earn over $20 and hour in wages, and cost over $28 in hourly costs to her employer—on average---compared to perhaps a wage as low as $2 an hour in another country. The disparity in wages in the U.S. is simply incredible: let’s say a worker may earn $7.25 an hour (the federal minimum wage in the U.S.----it has not risen in several years) in a chicken processing plant in Arkansas (most likely this worker came here from another country, either legally or ‘extralegally’---our economy RUNS on these workers!!) while a skilled worker may earn over $100,000 a year (no wonder the students in the Automotive classes get here earlier than I do---7:20am). The difference in a hypothetical U.S. worker’s hourly wage and her hourly cost to her employer ----that $8 (in theory) would consist of the employer’s share of FICA---remember FICA???—along with unemployment insurance, disablility &worker’s compensation benefits, possible medical benefits, 401k matching and pension benefits (not in most gig economy jobs) and other costs the employer bears but the employee does not see in her take home pay. The huge disparity (in theory) between labor costs in the U.S. compared to labor costs in another country are greatly diminished by the VERY likely fact that Factory #5 uses MUCH less labor---employs fewer workers than Factory #4. It is possible that Factory #5 uses fewer than half the workers in factory #4. If we did a walk-through of Factory #1, we would not believe that is was owned and operated by the same company. Toyota shut down its NUMMI plant in Fremont, while opening a new plant in Texas. We can estimate that the labor costs were much lower in the Texas facility. 2. TAX POLICY here in the U.S. compared to another country: our government entities---federal, state and local----may offer tax incentives for our firm to build Factory #5 in the U.S. (or the state of Nevada, where it is reported that Tesla may be receiving a ‘tax credit’ of perhaps 10% from the state). These possible tax incentives may be called an “Investment Tax Credit”--- I would call them a “Factory #5 construction tax credit”. Let’s not forget: the underlying reason to build the factory must be in place ---we must sell this steady stream of new extra shoes or cars or MRI machines—but if our price per pair is $30 and our cost per pair (without the tax incentives) is $27 and our projected profit is $3 per pair (in theory) then a 10% tax credit could raise our profits greatly. The issue: SOME OTHER COUNTRY also has a government, and it is offering its own tax incentives for us to build on THEIR soil. It can become a ‘bidding war’. Why does every country want our factory? JOBS! More on that later…..3. GOVERNMENT REGULATIONS (G REGS) HERE vs. THERE: every government of every country has established a framework of laws and regulations (regs) to protect its people. Sometimes a firm – like us—may take actions that are immoral and illegal. G REGS are put in place to address these actions, and in a perfect world, prevent them from happening in the first place. What can a firm ‘do wrong’ --- and what GOVERNMENT REGULATORY AGENCIES in the U.S. (as well as the legal system) exist to address and prevent these ‘wrongs’? 1. ‘TOO MUCH’ POLLUTION: if a firm pollutes the environment beyond a certain level, the legal system as well as the EPA (both federal and state---our state has the CARB and many other agencies) may step in to fine or enjoin the firm in the U.S.---thus raising our cost of doing business. What if this other country competing for our factory has a more relaxed set of pollution control laws and regs? 2. UNSAFE WORKING CONDITIONS: We have a pretty robust legal system and worker’s comp and worker’s disability system in the U.S.---for some workers, not all—compared to many other countries. We have the OSHA---both on the federal and state level—which can raise the cost of doing business---building the factory, then operating the factory once it is up and running---compared to another country 3. UNSAFE PRODUCTS: in the U.S. we have dozens of regulatory agencies, including the FDA, NHTSA, FAA, CPSC, the Dept. of Agriculture and DOZENS of other agencies to address, and hopefully prevent, unsafe products from being produced, distributed and sold in the U.S. 4. DISCRIMINATION: The EEOC (the Dept. of Labor) ---both federal and state---and our legal system act to address and try to prevent discrimination by employers against women, older workers, and other groups. The discrimination lawsuit that female employees filed against Walmart in the U.S. NEVER WOULD HAVE OCCURRED in many other countries 5. ABUSES OF MARKET POWER: The U.S. has a series of ‘Antitrust’ laws, created about 110 years ago and built on since, that try to address and prevent ‘abuses of market power’ by firms doing business in the U.S.---the relevant agencies include the Antitrust Division of the Justice Dept. and the Attorneys General of all 50 states (many are going after Google right now) as well as the FTC. 6. INACCURATE REPORTING OF PROFITS AND LOSSES---Enron being the classic example---when a firm doing business in the U.S. violates these laws, it may be prosecuted by the Dept. of Justice, the SEC, the IRS, and many other agencies. There are many other misdeeds a firm –maybe our firm---could perform, and other U.S. and state and local regulatory agencies that may prosecute us and raise our costs of doing business. What if this other country’s government – competing for our business - simply has a more…’relaxed’….. set of regulations? Wow! Some other country may offer cheaper labor, a more attractive tax package, a more ‘friendly’ set of regulations… why would our firm build factory #5 on U.S. soil? I believe that recent events help explain this set of concepts…
- WHY BUILD FACTORY #5 on U.S. soil? I mean, labor is cheaper in another country, Government Regulations may be more relaxed and cheaper to comply with, and the tax incentives offered by another country may be more attractive… so why build here? Many reasons, starting with: 1. the idea that the U.S. economy, with over $20 Trillion in annual Total Spending on all goods and services, is still the largest market in the world. US. HOUSEHOLDS, GOVERNMENTS and BUSINESSES buy every conceivable product and service. If our firm builds Factory #5 in another country, then we must incur 2.TRANSPORTATION COSTS and burdens that we may not be able to forsee. We have a pretty good example of this concept playing out RIGHT NOW. EVEN IF we build Factory #5 fifty feet south, or north, of our border, we must move our product across the border into the U.S. Our government (and every government I have ever read about) maintains the right to STOP AND INSPECT any and all cargo—this can take two minutes, two hours, two days, two weeks, two months. The same concept applies to people, as evidenced by the tragedy at our southern border. I have a friend who had a Y2K job up in Canada. She got off the plane in Toronto and she was ushered into a windowless room and ‘questioned’ for hours--- AND I THOUGHT CANADA WAS AN ALLY!!! If we must transport our products across the U.S. border by plane, truck, auto, ship, rail we are vulnerable to any FUTURE RISE in transportation costs—anticipated or not. Energy costs. Shipping costs. Fees at the Port of Oakland or Long Beach. Let’s say we plan to sell our product to buyers in the U.S. for the entire 20 year life of our factory. Do we ‘feel lucky’ for the next 20 years? Yes, yes, supply chains are very VERY interdependent----and, as we now know, fragile, at least in theory. What if a second terrorist attack similar in scale to 9\11 were to occur? Our government could, in theory, ENFORCE EXISTING LAWS AND PROTOCALS to “slow down” the stop and inspection process. The U.S. has thermal imaging technology whereby a container or truck is brought in to a bay and “Xray”d if you will…. If this technology were to be employed more vigorously, our product would not make it to the shelves, or to the Amazon “fulfillment center” in a timely basis, cutting in to those profit margins that we had anticipated. Do you feel lucky? MANY firms have built Factory #5 overseas… and then built their next factory, Factory #6, on U.S. soil---and they weren’t being altruistic or patriotic in their decision. Profit maximization is the driving force behind every decision a firm makes, including where to build Factory #5. 3. TRADE BARRIERS: TARIFFS AND QUOTAS! Again, the present time is instructive. As many of you know, the President of the U.S. can unilaterally, without approval by Congress, impose new, extra tariffs on products coming in to the U.S. The only brake on a reckless President is impeachment---and CONVICTION, as we know too well. Do you feel lucky? For the next 20 years? (a tariff is a tax on products coming in to the U.S.) Raising tariffs is widely seen as bad policy: the price of the imports rises for the U.S. consumer, cutting into her purchasing power, and our trading partner RETAILIATES by raising THEIR tariffs on OUR EXPORTS, thus costing U.S. jobs. Higher inflation AND higher unemployment, hurting two of the five major goals of Macro policy 4. “NON-QUANTIFIABLE” forces: let’s say we build factory #5 7,000 miles away from our headquarters for all the reasons we discussed earlier. It is up and running on Jan2. In Feb, the rains come---roads are washed out. Raw materials cannot arrive. No profits. In fact, we still have to make the mortgage payments on the Factory---our newest, best hope of survival. In March there is a LONG dockworker’s strike. A strike by dockworkers can happen here, but very rarely, and they not last very long. Again, an interruption of that steady flow of new, extra products. In May, the electricity is out. In June, the natural gas distribution is shut down. Again, it can happen here, but when it does it is a BIG DEAL, and, in the U.S., over 98% of the time, the lights are on and you can heat your home or office. And run your factory. The political pressure on PG&E has been sufficient to ensure somewhat reliable power---compared to some rival nations. In July, there is political upheaval leading to a GENERAL strike---almost NO ONE is working. No profits for us. Extreme case: there is a revolution---it happens—and our factory is destroyed, or worse, taken over by ‘the people’ and it becomes a “people’s” factory---but we still owe Bank of America the monthly mortgage payments---yes, insurance is possible---but we have lost our capacity in the meantime-----we have orders that WE CANNOT FILL---a rival firm will fill them. We lose market share. We complain to our government, and they tell us ‘WHY DID YOU BUILD FACTORY #5 in THAT country?” The biggest mistake we can ever make. Factory #5 was our future. The U.S. may very well be the most profitable place to build factory #5.
following the lectures to answer all of the questions.

1. Please list and discuss at least four government regulations that may be stricter for a firm, and more costly to comply with, in the U.S. as compared to other countries.

2. What "hurdles" must a firm overcome in order to build a factory in the next 12 to 24 months?

3. What forces may influence a firm to build its next factory in another country? Which one force may be the most important, in your opinion? Why?

4. What forces may influence a firm to build its next factory on U.S. soil? Which one force may be the most important, in your opinion? Why?

In: Economics

Spending on credit cards decreases after the Christmas spending season​ (as measured by amount charged on...

Spending on credit cards decreases after the Christmas spending season​ (as measured by amount charged on a credit card in​ December). The accompanying data set contains the monthly credit card charges of a random sample of 99cardholders. Complete parts​ a) through​ e) below.

December on left and January on the right

1542.99

902.92

4301.97  

7208.23

4229.48

4240.16

202.62

79.93

3298.47

4040.63

874.08  

89.25

3806.31

3293.15

1934.11

2419.43

99.25

83.86

503.91

6.43

410.93

0.00

683.66

563.93

2160.65

2713.77

1123.17

187.02

2506.62

3266.62

1838.22

1522.32

9.94

1358.47

2332.42

732.94

78.51

75.03

101.31

70.21

598.23

634.71

648.87

1040.59

235.97

553.45

1266.34

1017.34

2123.35

1305.54

3.66

249.23

306.35

48.71

1902.49  

872.77

558.68

485.62

2447.96

616.65

2799.33

1573.35

531.52

422.78

536.58

770.33

766.98

56.54

1958.44

1486.71

1678.16

495.43

2062.18

1065.31

397.08

510.51

5646.52

5640.14

5.51

5.51

2281.11

870.86

3820.38

1635.04

89.14

92.22

1450.51

669.75

527.35

829.29

105.86

69.26

1403.84

831.72

4234.61

2300.57

632.74

270.51

970.88

210.38

348.42

1011.16

0.00

1043.93

49.96

298.57

29.99

−29.99

471.78

1636.98

1115.95

1733.31

70.66

0.00

31.07

31.41

4.95

4.95

2523.13

1088.45

16.94

26.89

40.52

120.15

259.18

2006.79

123.05

291.22

0.00

104.07

109.71

52.99

5053.41

2839.36

3675.48

675.63

139.88

221.54

75.96

37.76

3150.92

533.41

2987.39

1932.47  

651.55

692.88

9128.77  

6810.41

916.81

393.47

2875.81

1308.63

797.06

796.87

34.56

0.00

44.16

1039.53

478.48

564.97

762.14

339.33

2349.94

5275.61  

44.29

40.07

43.25

43.37

1339.34

653.49

1127.91

1072.21

2801.17

2336.41

52.09

91.46

1294.14

1434.02

328.19

720.64

28.31

28.58

598.68

980.71

4283.98

1576.08

568.23

0.00

479.75

162.04

1616.93

493.82

285.44

533.55

1283.98

462.53

3761.71

1477.77

a) Build a regression model to predict January spending from​December's spending.

Jan=____+____DEC (Round to four decimal places as​ needed.)

Check the conditions for this model. Select all of the true statements related to checking the conditions.

A. All of the conditions are definitely satisfied.

B. The Randomization Condition is not satisfied.

C. The Nearly Normal Condition is not satisfied.

D. The Equal Spread Condition is not satisfied.

E. The Linearity Condition is not satisfied. ​

b) How​ much, on​ average, will cardholders who charged ​$2000 in December charge in​ January?

​$ ____ ​(Round to the nearest cent as​ needed.) ​

c) Give a​ 95% confidence interval for the average January charges of cardholders who charged ​$2000 in December.

($____,$____)​(Round to the nearest cent as​ needed.) ​

d) From part​ c), give a​ 95% confidence interval for the average decrease in the charges of cardholders who charged ​$2000 in December.

($____,$____)(Round to the nearest cent as​ needed.) ​

e) What​ reservations, if​ any, would a researcher have about the confidence intervals made in parts​ c) and​ d)? Select all that apply.

A. The data are not​ independent, so the confidence intervals are not valid.

B. The data are not​ linear, so the confidence intervals are not valid.

C. The residuals show increasing​ spread, so the confidence intervals may not be valid.

D. The residuals show a curvilinear​ pattern, so the confidence intervals may not be valid.

E. A researcher would not have any reservations. The confidence intervals are valid.

In: Statistics and Probability

1.If the government spending multiplier is 1 then a $1 increase in deficit-financed government spending will...

1.If the government spending multiplier is 1 then a $1 increase in deficit-financed government spending will lead to a zero percentage increase in output.

a-true

b- false

2. If the marginal propensity to consume is 13 then the government spending multiplier is 3.

a-true

b- false

3.Which combination of policies are likely to provide Keynesian stimulus to an economy in a depression?

a-Tax cuts on investment and increases in defense spending.

b-An increase in the income tax rate and an increase in transfers going to unemployed workers.

c-An increase in the income tax rate and cuts in defense spending.

d-An increase in salaries paid to members of Congress and a cut in the money supply.

In: Economics

Deficit spending (a higher government spending for a given tax rate) appears to have a negative...

Deficit spending (a higher government spending for a given tax rate) appears to have a negative effect on the economy but in the IS-LM model we can see that the opposite is true. A higher G increases the GDP by enhancing demand. Which one do you think is true? Can you reconcile these two ideas? What is your conclusion in terms of practical policy?

I need some help with this

In: Economics

The financial sector channels savings out of the spending stream, thereby keeping it from the spending...

The financial sector channels savings out of the spending stream, thereby keeping it from the spending stream

a. true

b. false

In: Economics

Data                                         1  &n

Data                                         1                              2                              3                              4              1                              2

Budgeted unit sales                 50,000                     65,000                     110,000                   65,000     80,000                     95,000

Selling price per unit                                                              $7 per unit

                               

                                                                                Year 2                                                     Year 3

                                                1                              2                              3                              4              1                              2

Budget Unit Sales                   50,000                     65,000                     110,000                   65,000     80,000                     95,000

Selling price per unit 7$ per unit

Accounts receivable, beginning balance 65,000

Sales collected in the quarter sales are made 75%

Sales collected in the quarter after sales are made 25%

Desired ending finished good inventory is 30% of the budgeted unit sales of the next quarter

Finished goods inventory, beginning $12,000

Raw materials required to produce one unit 5 pounds

Desired ending inventory of the raw material is 10% of the next quarter’s production needs

Raw material inventory, beginning 23,000 pounds

Raw material costs 0.80 per bound

Raw materials purchases are paid 60% in the quarter the purchase are made

Accounts payable for raw material, beginning balance$ 81,500

               

1. What are the total expected cash collections for the year under this revised budget?

2. What is the total required production for the year under this revised budget?

3. What is the total cost of raw materials to be purchased for the year under this revised budget?

4. What are the total expected cash disbursements for raw materials for the year under this revised budget?

5.

After seeing this revised budget, the production manager cautioned that due to the current production constraint, a complex milling machine, the plant can produce no more than 80,000 units in any one quarter. Is this a potential problem?

Yes or No ?

* Please provide answers with excel formulas

In: Accounting

A company expects to sell 6,000 units in April and expects sales to increase 20% each...

  1. A company expects to sell 6,000 units in April and expects sales to increase 20% each month after. The unit sales price of $8 is expected to remain constant. The company wants ending finished goods inventory to be 15% of the next month’s sales.
  1. What are budgeted sales revenues for the second quarter?
  1. How many units will be produced in the second quarter? Round answers to nearest whole number.
  1. The raw materials ending inventory should be 20% of the next month’s production needs. Assuming each unit requires 4 feet of material that costs $3 per foot, what is the cost of May purchases?
  1. Monthly manufacturing overhead is budgeted to be $15,000 per month plus $8 per unit produced. What is budgeted manufacturing overhead for May?
  1. If each unit required 0.75 hours of labor, and the labor wage is $9/hr, what is budgeted DL cost for May?

In: Accounting

produces several types of pickled vegetables. The company budgets for each quarter in the last month...

produces several types of pickled vegetables. The company budgets for each quarter in the last month of the previous quarter. In early March, Karen is preparing the budget for pickled beets. Budgeted sales are 13200 jars for April, 16500 jars for May, and 21000 jars for June. Each jar requires 1.3 pounds of beets. The pickling process takes 60 minutes for 20 jars. Because pressurized cooking is used, the processing is monitored by an employee at all times. Each jar of pickled beets sells for $15.00.

Karen requires ending Finished Goods inventory equal to 30% of the following month’s sales. Other information is as follows:

Standard direct labor rate

 $12.00 per hour

Manufacturing overhead rate

 45.00 per direct labor hour

Price of beets

 6.00 per pound

Price of jars, 100-lot

 150.00 per lot


What is Karen’s direct labor budget for May?

In: Accounting

Johnson Industries manufactures a popular interactive stuffed animal for children that requires four computer chips inside...

Johnson Industries manufactures a popular interactive stuffed animal for children that requires four computer chips inside each toy. The company pays $3 for each computer chip. To help to guard against stockouts of the computer​ chip, Johnson Industries has a policy that states that the ending inventory of computer chips should be at least 30​% of the following​ month's production needs. The production schedule for the first four months of the year is as​ follows:

Stuffed animals to be produced

January. . . . . . . . . . .5,900

February. . . . . . . . . . .4,000

March. . . . . . . . . . .4,700

April. . . . . . . . . . .4,600

Prepare a direct materials budget for the first quarter that shows both the number of computer chips needed and the dollar amount of the purchases in the budget.

Prepare the direct materials budget by first calculating the total quantity​ needed, then complete the budget.

Johnson Industries

Direct Materials Budget

For the Months of January through March

January

February

March

Quarter

Units to be produced

Multiply by: Quantity of direct materials needed per unit

Quantity needed for production

Plus: Desired ending inventory of direct materials

Total quantity needed

Less: Beginning inventory of direct materials

  

Quantity to purchase

Multiply by: Cost per unit

Total cost of direct material purchases

  

  

In: Accounting

Q1. Headquartered in Plainfield, Indiana is the Chimney Safety Institute of America which, among other things,...

Q1. Headquartered in Plainfield, Indiana is the Chimney Safety Institute of America which, among other things, certifies Chimney Sweeps. There are three steps to becoming certified: purchase (and study) $515 of books, attend an in-person or online review or six-day training school (each of which is several hundred to over a thousand dollars), and pass an exam (again, a few hundred dollars). After this, there is an annual $229 certification fee. The website says that being certified proves “you’re one of the best,” and that certification “is the measure of a chimney sweep’s knowledge about the evaluation and maintenance of chimney and venting systems.” Presumably, the CSIA would argue that its certification protects consumers; given the information presented this week, aside from ensuring high quality chimney sweeps, why else might existing chimney sweeps find it in their interest to protect the certification system? Select one:

a. The certification system encourages the entry of chimney sweeps into the industry since it weeds out sellers who are only interested in making a quick profit. The stature of having a certification is attractive to potential entrepreneurs, and the supply of chimney sweep services (and the labor supply of chimney sweeps) is increased by having the certification system.

b. Currently-certified chimney sweeps have unique knowledge to accurately judge the subtle characteristics of chimney design that most consumers would never notice, but that still affect the longevity of their chimneys. Without the certification system, consumers would consistently be ripped off by chimney sweeps without this knowledge.

c. The certification system is effectively a barrier to entry which hinders new chimney sweeps from competing with established chimney sweeps; the supply of chimney sweep labor and chimney sweep services is thereby decreased, and prices and profit are higher than would exist in a more open, competitive market.

d. Most certification is done for occupations that sell physical goods, not services like chimney sweeping. The entry-barrier problem with occupational licensing only applies to sellers of physical goods, not services, so certified chimney sweeps support the certification system since it encourages competitiveness in their industry, which benefits them and consumers alike.

Q2. What side effects might the (one-time and annual) fees, training, and exam introduce into the chimney sweep market?

Select one:

a. The fees, training, and exam are more likely to exclude low-income entrepreneurs from earning income by being a chimney sweep. It may (slightly) exacerbate income inequality since only higher-income individuals would consider the fees, training, and exam to be affordable, who thereafter would be able to earn income as a chimney sweep.

b. The low fee helps to ensure that uncertified chimney sweeps will not enter the market and attempt to sell high-priced chimney sweep services to compete with the lower-priced products of certified chimney sweeps. The fees, training, and exam help to prevent new entrants from exercising too much market power.

c. The fee and exam are going to encourage only serious entrepreneurs to become chimney sweeps. Those who do not really want to become chimney sweeps will be dissuaded by the requirements, thus ultimately improving the quality and lowering the price of chimney sweep services for consumers.

d. Being known as a certified chimney sweep, who passed an exam, will improve the reputation of certified chimney sweeps. The fee payments, however, do nothing to affect the chimney sweep's reputation. Since both the exam, training, and fees are mandatory, it is unclear whether the requirements will improve the quality and lower the price of chimney sweep services in Louisiana.

Q3.  You may be familiar with stories (even from your own experience) of employees who choose to denigrate or subtly sabotage their fellow employees rather than focusing on how they themselves can be better or more productive. Often, a company may notice not that a single employee behaves this way, but that many, most, or all of them do. It seems obvious that spending time and energy figuring out how to make other employees appear worse, instead of spending that time and energy to make yourself better, is harmful to the company, but the behavior continues to be seen among large groups of workers. How might game theory offer an explanation for this behavior?

Select one:

a. The behavior is a result of a prisoners' dilemma. An employee finds that his own position is improved if a fellow employee appears worse, regardless of whether the fellow employee engages in that sabotaging behavior or not. While it is best for everyone (and the company) overall to not have any of that behavior occur, the result is that it will happen frequently because it is in each employee's individual best interest to sabotage.

b. An employee will engage in sabotaging behavior because doing so is a one-shot game. The employee knows that it will only take a single instance of a fellow employee appearing to be negligent to get that fellow employee fired, so the sabotaging employee will remain hired but with fewer fellow employees with which to compete.

c. The sabotaging behavior is a dominated strategy that always harms the company and the employees. Since it continues to occur, though, then employees have failed to eliminate it as a strategy, and since it hasn't been eliminated, it becomes the most likely outcome.

d. The sabotaging behavior is the result of a sequential game, where the employees attempt to be the "first mover" and be the first to sabotage their fellow employees. If a fellow employee is the first one to appear worse to the managers (and I am thus the first one to appear better to the managers), then if I am a later victim of sabotage by my fellow employee, the manager won't think as badly of me since it happened later in time.

In: Economics