ACTIVITY #1: MAKING ECONOMIC CHOICES (10 POINTS)
The purpose of this activity is to illustrate how the rules of the economic system influence individual incentives and choices.
Step 1 末 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 current situation so you値l have a good mental picture of where you are financially and what you need to accomplish.
Step 2 末 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.
Step 3 末 Once you are comfortable that you have chosen the best investment, given your and your company痴 situation, write a summary of your choices that includes the following.
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
specific and detailed connections to course content (Sometimes students do a good job of summarizing what is in the course material, but do not connect that summary to an activity they have completed. Other times, students tell a great story, but fail to connect the story to course materials.)
Please be careful to use correct spelling and grammar.
Step 4 末 By the deadline shown in the Course Schedule on the main page of the syllabus:
Send your summary containing the four items requested in the body of a new email to dramyglenn@earthlink.net.
Put only your name and Activity #1 at the beginning of your email.
Be careful to use the correct subject line. If you are not positive you know the correct subject line, go back and read your syllabus carefully. Emails with incorrect subject lines will not reach me. At best, you'll correct your mistake later and your assignment will be late. At worst, your assignment will never reach me and you'll receive no points for it.
Late summaries will lose one point per day late, including weekends and holidays.
CHOOSE ONE OF THE FOLLOWING TWO COMPANIES.
ABC Investment Company 末 You are president of an investment company in a small town. Due to changes in the economy that were beyond your control, your company has lost a tremendous amount of money in the past few years. In fact, your company is broke 末 you have more debts than assets. 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. 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. But your own job is on the line. Today, you have to decide how to invest $100,000.
XYZ Investment Company 末 You are president of an investment company in a small town. Your company has had 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, 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.
NOW THAT YOU KNOW WHICH COMPANY IS YOURS, CHOOSE ONE OF THE FOLLOWING FOUR INVESTMENTS.
Investment Possibility #1 末 EZ 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 末 Reliable Auto Parts Store
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.
Investment Possibility #3 末 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 will succeed.
Investment Possibility #4 末 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.
READ THE FOLLOWING SECTIONS FROM THE MARGIN NOTES.
