the hotdog stand

[hypotenuse]

I'm reviewing for my economics test next week, working through the study guide. Chapter One and have hit a snag. Ok. So I'm using the common sense guide to economics but it's not working. Dazed and

Here's the setup.

17. You have spent $1000 building a hot dog stand based on estimates of sales of $2000. The hot dog stand is nearly completed but now you estimate total sales to be only $800. You can complete the hot dog stand for another $300. Should you complete the hot dog stand? (Assume the hot dogs are costless to you.)

a. yes
b. no
c. There is not enough information to answer the question.

18. Referring to Question 17, your decision rule should be to complete the hot dog stand as long as the cost to complete the stand is less than

a. $100
b. $300
c. $500
d. $800
e. none of the above


Now.

My answer is yes, I should finish the stand because getting some money back is better than getting no money back. However, because I've already spent $1000 and am only getting $800 in return, where is my cutoff for throwing good money after bad? The book says $800 is the magic number.

Ok. But why?

Do I just write-off the $1000 I've already spent? If I just write it off, why bother spending another $800 to make another $800? I could just save myself the time and bother by not finishing the stand. (Plus all those other expenses they're telling me to ignore...)

Lynne

PS - No IRS answers. This is supposed to be basic economics.

[theeye]

Your logic is right on target. The book's answer is just slightly deceptive. What they mean to say is that you'd be ahead if you spent up to, say, $799.99. Or that you could spend $800 and not have lost anything.

But, of couse, in the real world, you'd probably want an expected positive profit of more than a penny before you went ahead with the process. After all, there are other ways you could invest your money that might offer a better return.

Moral of the story: do not base real world decisions on the advice of basic economic texts. And trust your instincts -- they're pretty good.

[magenta321]

"Total sales"?

Does this mean all the profit you estimate to earn in your life? In a week? In a month? A year? Etc.

I haven't taken economics in years, so you can discount my opinion. But, I don't feel like there is enough info to answer the question. If I knew how long it would take to make the $800, I could then justify or not justify spending the extra money. If it would take me 20 yrs to earn it, I would not continue. If it took me less than a year, I would continue, since I could continue to make $800 year after year (or month after month, or whatever).

[hypotenuse]

Thanks!

I thought I had missed whatever it was they were trying to tell me. My problem looks like it's going to be leaving out real world stuff and just concentrating on textbook stuff.

College.... A learning experience.

Originally posted by theeye

Moral of the story: do not base real world decisions on the advice of basic economic texts.

Wonder how pissy my instructor would get if I were to use your answer on my test.

I only need a C to pass...




Lynne

[hypotenuse]

Originally posted by magenta321
"Total sales"?

Does this mean all the profit you estimate to earn in your life? In a week? In a month? A year? Etc.

Total would be all I expected to make from the hotdog stand. Ever.

My business is already a loss and I haven't even finished the stand....

Lynne - who thinks she will either use it as a tax write-off or declare bankruptcy.

[theeye]

If it's really total over time, then a present value analysis would be in order.

But that brings us back to: it's a basic economics text. In other words, a simplistic, meaningless approach to things. You'll just have to learn to give them the answers they expect. If you're really good, you'll also figure out how to do some more thoughtful analysis on the side.

[amykhar]

My calculations are a bit different. If you stop building now, you are GOING to lose $1000. If you spend the other $300 to finish it, you will only lose $500 (1000 + 300 -800)

Now, the MOST you should lose would be the 1000 you have already lost. Therefore, the max total loss should be 1000. If the cost to complete the stand plus the 1000 you already spent minus 800 > 1000, you don't do it. Otherwise, you do. This is why 800 is the cap for the second answer.

Amy

[magenta321]

But, you really don't have enough info, still.

$800 is your total. I can accept that. But, still, the time thing bothers me.

If two weeks is how long your business lasts, and it nets you $800, it's really going to be $800.

But in twenty years, inflation will have changed that $800 and you will have earned less money than you did if you earned it in two weeks.

The value of $800 goes down over time, and that needs to be factored in, no?

[AdaDavis]

Okay, take this for what it is worth from someone with a BSBA that included 5 (ugh!) semesters of economics:

Nothing about economics is intuitive, or "common logic."

The priniciple here is sunk costs. If you have already spent money on something, and you cannot get it back, then it no longer figures in the equation, and does not matter. It doesn't matter it it was a dollor, a thousand dollars, or a billion. It is gone for good, so forget it.

Forget what you have already spent on the hotdog stand. Sunk cost. The only thing that matters is what you spend from this point forward, and how much you will make. If you will make $800, then you should finish the stand if it will cost you less than $800 to finish. If it will cost $800 or more, then abandon it. Period.

Of course, in real life, things are more complicated, but the principle is the same.

I remember a particular problem like yours. It went something like: You have 2 tickets to the (game, concert, play ??) that cost you $100 each, and it is too late to get the tickets refunded. It will cost you $30 for parking to go to the (game, concert? - can't remember.) The you discover that a friend is having a party that you really want to go to on the same night. Everything being equal, you think the party will be more fun than the game. What do you do? Of course, you attend the party. Even if parking were free at the game/concert, you should still attend the party. I remember this problem because of the 4-5 people who tried desperately to prove that : Waaaaa! I can't go to a free party and abandon tickets that cost $200!

When I was at the Pentagon, I took great glee in cancelling defense contractor cashcow projects and finding less expensive alternatives. There are a few contractors in the DC area that really hate my guts, and a few government workers still wailing But how could you do that? We had $X million dollars invested in that project!

Ada

[hypotenuse]

Originally posted by theeye
If it's really total over time, then a present value analysis would be in order.

But that brings us back to: it's a basic economics text. In other words, a simplistic, meaningless approach to things. You'll just have to learn to give them the answers they expect. If you're really good, you'll also figure out how to do some more thoughtful analysis on the side.

I hate that though... I'm a why person. Very much a why person.

Looks like this is going to be like shifting graphs. When your shift is to the x inside of the x instead of tacked on afterwards, ie the square root of (x + 2) instead of the square root of x + 2, you would think to shift to the right, as it's positive, only you shift to the left instead. The opposite of what you think it should be.

And I don't know if that makes sense to anyone else. It just happens to be how I remember it. And it's what we're working on in math so it's at the top of my brain right now.

Looks like I'm going to be having to remember lots of these economic rules. Just much rather know why and not have to remember the rules.



Lynne

PS - if anyone wants to explain the shift so that I don't have to remember that rule either it would be much appreciated

PPS - perhaps I shouldn't be pointing out exactly how not smart I am.

[hypotenuse]

Originally posted by amykhar
My calculations are a bit different. If you stop building now, you are GOING to lose $1000. If you spend the other $300 to finish it, you will only lose $500 (1000 + 300 -800)

That's how I got the answer to no. 17.

But!

Now, the MOST you should lose would be the 1000 you have already lost. Therefore, the max total loss should be 1000. If the cost to complete the stand plus the 1000 you already spent minus 800 > 1000, you don't do it. Otherwise, you do. This is why 800 is the cap for the second answer.

Amy

You lost me.

English Amy. One syllable words. Lots of 'em.

Please?


Lynne

[hypotenuse]

Originally posted by magenta321
But, you really don't have enough info, still.

$800 is your total. I can accept that. But, still, the time thing bothers me.

If two weeks is how long your business lasts, and it nets you $800, it's really going to be $800.

But in twenty years, inflation will have changed that $800 and you will have earned less money than you did if you earned it in two weeks.

The value of $800 goes down over time, and that needs to be factored in, no?

Yes.

Well, I would say so IRL. Also the value of the hotdog stand itself would be worth more finished vs. unfinished and now vs. later when it comes to wear and tear etc that would have to be deducted each year after it was built.

See? I did TO pay attention to my accounting prof!

It's just that I think we have to look at only the info supplied by the problem. Which is why I keep messing up. Wanting to add in IRL stuff.


Lynne

[amykhar]

1. If you do not finish building the stand, you will lose $1000 (it's already been spent, can't get it back)

2. If you finish the stand, the amount you spend to finish it should not make you lose any more than $1000 total; otherwise, you would be better off not finishing it. Anything loss less than $1000 means you have come out ahead vs. doing nothing at all.

So, $1000 (already spent) + x (amount to spend) - $800 (revenue from stand) must be less than $1000. Now, you can cancel out the $1000 on either side (sunk costs - you can't get em back as Ada already said.)

This gives you x - 800 <= 0 or x <= 800.

I haven't really said anything that everyone else didn't say. However, I believe my way of phrasing it is closer to how a normal, non economist, would logic their way through it.

Amy

[hypotenuse]

Originally posted by AdaDavis
Okay, take this for what it is worth from someone with a BSBA that included 5 (ugh!) semesters of economics:

Nothing about economics is intuitive, or "common logic."

I'm gonna fail.

The priniciple here is sunk costs. If you have already spent money on something, and you cannot get it back, then it no longer figures in the equation, and does not matter. It doesn't matter it it was a dollor, a thousand dollars, or a billion. It is gone for good, so forget it.

But, but, but... that doesn't make sense!

And they left that principle out of Chapter One. Looks like they figured it in to the the problem though. I will remember this.

Forget what you have already spent on the hotdog stand. Sunk cost. The only thing that matters is what you spend from this point forward, and how much you will make. If you will make $800, then you should finish the stand if it will cost you less than $800 to finish. If it will cost $800 or more, then abandon it. Period.

Of course, in real life, things are more complicated, but the principle is the same.

I remember a particular problem like yours. It went something like: You have 2 tickets to the (game, concert, play ??) that cost you $100 each, and it is too late to get the tickets refunded. It will cost you $30 for parking to go to the (game, concert? - can't remember.) The you discover that a friend is having a party that you really want to go to on the same night. Everything being equal, you think the party will be more fun than the game. What do you do? Of course, you attend the party. Even if parking were free at the game/concert, you should still attend the party. I remember this problem because of the 4-5 people who tried desperately to prove that : Waaaaa! I can't go to a free party and abandon tickets that cost $200!

When I was at the Pentagon, I took great glee in cancelling defense contractor cashcow projects and finding less expensive alternatives. There are a few contractors in the DC area that really hate my guts, and a few government workers still wailing But how could you do that? We had $X million dollars invested in that project!

Ada

I get it. But dawg. It hurts to know you can't get it back - the money is lost forever. I don't know if it's just counter intuitive to me, or if it's just that I'm such a cheapskate.

Thanks Ada! Really appreciate the explanation.

Lynne

[hypotenuse]

Thanks Amy! I can work with a formula.

Just couldn't figure out why the $1000 would be the <=. But using the sunk principle thing supplies that parameter.

The world should run on math formulas. <--- normative statement - chapter two...

:snicker:


I really appreciate everyone helping with this. I'll probably have more questions as time goes by, but hopefully I'll get out of the baby questions soon.


Lynne

[slick4591[$]]

Are these all beef hot dogs?

[hypotenuse]

Originally posted by slick4591
Are these all beef hot dogs?

Who's asking? You or the pigs?


Lynne

[amykhar]

Where's the beef?!

[slick4591[$]]

Me. I like 'em better and might buy a few from you.

[theworm[$]]

I prefer a good Tofu-Pup with mustard and sourkraut. Yum!

[AdaDavis]

Originally posted by slick4591
Me. I like 'em better and might buy a few from you.

If you will pay her more than $800 for all of her hot dogs, I'm sure she will cut you a deal. (Or even more than $500, because then she wouldn't have to finish the friggin' stand.)

[magenta321]

Um, will there be cheese burgers at this hot-dog stand? Ground sirloin ones?

I don't like hotdogs, tofu dogs, or hamburgers. I do like sirloin cheese burgers, however.

I just want to know if I should be supporting your new business.

[mjfrombuffalo[$]]

See, my thinking when I read this was to make a parallel with time. Say you're watching a 2 hour movie and one 1/2 hours into it, you realize you hate it. Are you going to spend another 30 minutes of your time, irretrivable, in the theater or are you going to leave? Most people would probably stay "since I've already paid and seen 1 1/2 hours of it." But bailing makes more sense 'cause you can spend the 30 minutes doing something else you'd enjoy. So I would fail this class too -- I can't see throwing more money after lost money

mj

[slick4591[$]]