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(Optional) Read the following chapters from the textbook.
Chapters 05 - 07
D. The following Optional Links will help you do better in your course but they are not required.
Activity #1: Making Economic Choices (10 points)
of Activity #1 is to illustrate how the rules of the economic system influence
individual incentives and choices.
Read the descriptions
below for the ABC Investment Company and the XYZ Investment Company.
Pick which company you wish to represent. Reread the description of your company
and its current situation so you’ll have a good mental picture of where you
are financially and what you need to accomplish.
Choose one of the
following two companies.
Company #1 --
ABC Investment Company
You are president
of an investment company in a small town. Due to changes in the economy that
were beyond your control, (1) your company has lost a tremendous amount of money
in the past few years. In fact, your company is broke –– you have more debts
than assets. (2) You have already lost your own money that you invested in the
company. You need to earn a sizable amount of income or your employees will
lose their jobs. (3) Fortunately, the money that people gave to you to invest
is insured by a special fund. The town government has supported the insurance
fund and has announced that it will pay back anyone who loses money at one of
the town's investment companies. Therefore, you are not worried that your customers
will try to take their money out of your company. (4) But your own job is on
the line. Today, you have to decide how to invest $100,000.
Company #2 --
XYZ Investment Company
You are president
of an investment company in a small town. Your company has had (1) steady, but
not spectacular, earnings in the past few years. Your performance has been adequate
as the economy has been weak recently. You are thinking of making some slightly
more risky investments in an attempt to increase your profits, (2) but some
of the people that have their money in your company are concerned about the
shaky economy. Because your town has not adopted an insurance fund to cover
losses of investment companies, some of your customers are nervous that they
will lose their money. In fact, a few have already taken their money out of
your company. Mr. Greenback, the richest man in town and your biggest customer,
has asked you several times whether you are making safe investments with his
money. Yesterday, you saw him talking to the president of your main competitor,
which has a strong reputation for making safe and steady investments. Today,
you have to decide how to invest $100,000.
Read the descriptions
below of the four potential investments available to you. Keep in mind that
you need to approach this as the president of the company you chose, given whatever
circumstances that company is dealing with at the moment. Think through the
possible consequences for you and your company under each possible investment.
Determine how you will invest your $100,000 among the four possibilities, given
the limited choices and information in the scenarios. You can use the $100,000
to fund all or just a portion of any of the investments.
that you've chosen your company, choose your investments from the following
Investment Possibility #1 –– E-Z Money Oil Company
This company is
digging oil wells in Texas. It needs $100,000 to continue operations. If it
hits an oil field in the next year, it will provide a huge return on
the investment. But if it doesn't hit an oil field, it will probably go broke.
Your loan officer estimates that there is a 20% chance that EZ Money
will hit a gusher.
Investment Possibility #2 –– Reliable Auto Parts
The mechanic at
the town's gas station needs $75,000 to open an auto parts store. Currently
people have to travel to another town to get auto parts. Because of the bad
economy, people are keeping their cars longer and making more repairs. Your
loan officer estimates that the store would lose a little money in the first
year, but that there is an 80% chance that it would eventually
provide a reliable return on your investment.
#3 –– Florida Sinkhole Corporation
A real estate company
in Florida needs $100,000 to complete the construction of a condominium. Currently
there is strong demand for housing in Florida, so there is potential for
a large return on this investment within the next year. But if demand decreases
by the time the condo is built, there is also potential for huge losses.
You loan officer estimates that there is a 40% chance that this venture
#4 –– Delicious Doughnut Bakery Shop
The cook at the
local restaurant needs $80,000 to open a bakery. The cook's doughnuts are so
popular at the restaurant that townspeople formed a club called "The Doughnut
Society" to discuss the merits of the chocolate versus the sugar doughnut. Accompanying
the loan application from the cook are a dozen jelly doughnuts and a petition
from the Doughnut Society. However, the cook insists on using very expensive
ingredients and will probably make only a small profit for several years. Your
loan officer estimates that there is a 75% chance that the business will
earn a healthy profit after two to three years.
Once you are comfortable
that you have chosen the best investment given your and your company’s situations,
write a summary of your choices that includes the 4 points below.
Your summary should be thorough, specific, include relevant concepts
from the course material and be free of spelling and grammar errors. [NOTE:
As I've done below, I almost always list the things you need to include
in your assignment so you won't miss anything. However, you should never
write an assignment as a list unless the instructions specifically tell
you to do so. Lists encourage short, quick responses, and they don't usually
require much thought or much attention to spelling and grammar. They also won't
earn you many points! Instead, write your assignment in complete sentences and
paragraphs, using the list only to be certain you cover everything. Do your
best to make your writing thorough, thoughtful and organized. Don't try to be
concise ,,, Try to be complete.]
which investment company you chose
how you chose to invest your money
a detailed explanation of why you chose to invest
your $100,00 as you did (There are right and wrong answers in
this activity so think carefully about the investment choices you make
and why. On the other hand, giving NO explanation at all will seriously
limit the number of points you can earn for this activity.)
specific and detailed connections to course content.
Always include course
concepts in your work. If you're reading your margin notes and watching
the presentations, you'll have plenty of material from which to choose
on every activity.