24 replies to this topic

[Shotgun Willy]

I was asked this question today in economics class and I wanted to share it. I thought it was funny as hell.

The Department of Defense awards you a cost-plus-10% contract to build missiles in your garage. Which of the following may you legitimately include in your costs?

(a) Original cost of constructing the garage, adjusted for inflation and depreciation.
( Weather damage to your car from parking it outside because your garage is full of missile-making machinery.
© Cost of lengthening the garage by four feet so the missiles don't extend into your driveway where neighborhood children might accidentally set one off.
(d) Cost of the course you took at the community college to qualify as a missile maker so you could win the government contract.
(e) Cost of the math courses you took years ago which turned out to be prerequisites for the course on missile making.
(f) Cost of your elementary school education, since you wouldn't be able to manufacture missiles if you didn't know how to read.
(g) Cost of the tetanus shot you received when you were three years old, which saved your life and thereby enabled you to become a successful defense contractor.
(h) Cost of psychological counseling whereby you seek to overcome depression when your children scorn you as a member of the military-industrial complex.



One more question: Do hot dogs taste better at the ball park, where they cost twice as much as they ordinarily cost? Do they taste better because they cost more?


I have a couple more I might add later

[ᗅᗺᗷᗅ]

Let me answer the hot dog question. Yes, more expensive hot dogs taste better. Or at least we think they do.

There is an interesting phenomenon to human psychology that equates price with quality. Often there is some truth in this assumption -- a Mercedes S500 costs more than a Chevy Malibu for a reason. But is the difference in price proportional to the difference in quality? The aforementioned S500 costs as much as six times more than the Malibu. Now, no one will deny that the S500 is a better car than the Malibu, but is it six times better? Maybe not, but people are willing to pay as if it was.

Even more interesting are studies which have found that if a product or service is priced too low, people will not buy it. The natural assumption is that if it's cheap, it must not be any good. In other words, if that same S500 cost only, say $10K instead of $100K, people might not buy it. Or, at least, the high-income people normally attracted to such automobiles would not buy it.

Our minds cannot help but associate price with quality. Similarly, we easily fall prey to marketing tricks, like pricing items at $19.99 instead of $20 -- we know rationally that the difference between those prices is so small as to make no difference, yet still our brains think, "Hey, it's less than twenty bucks."

There are entire courses dedicated to the psychology of marketing, and how to make us spend more than we want to.

[Shotgun Willy]

he he he

yes, A hot dog that is twice as expensive probably tastes better to someone who is willing to pay that much for it.

[ᗅᗺᗷᗅ]

Ha ha.

Now, on your first question, the logical answer would seem to be © The cost of lengthening your garage. But, this being a question about government contracts, I would not be surprised to find out that ALL of those choices are deductible!

[Shotgun Willy]

lol, I think you misunderstood the question. It isn't multiple choice, each of those is a yes or no question: "Can this be legitimately included in the 'cost?'" is the question that needs to be asked for every one of those

but, yes, part c) can be included in the cost.

[Invicta]

A-E + H? Or put another way, all of the above except for F and G?

Or as Jor said, all of the above?

Rationally, I would say C and possibly D, but I expect it's a lot more than that.

[ᗅᗺᗷᗅ]

I see, ShotgunWilly. Well, again, if it were a logical world, I would think only © would apply. But I have a feeling that's not the case. I can't wait to hear which ones are legitimately allowed to be included in bidder's costs!

[Shotgun Willy]

Answer:


The Department of Defense awards you a cost-plus-10% contract to build missiles in your garage. Which of the following may you legitimately include in your costs?

(a) Original cost of constructing the garage, adjusted for inflation and depreciation.
You cannot count this towards the "cost." The garage was already paid for and has nothing to do with the contract. It's known as a "sunk cost" because it's already happened and has been "sunk"
( Weather damage to your car from parking it outside because your garage is full of missile-making machinery.
Yes, this can be counted towards the cost
© Cost of lengthening the garage by four feet so the missiles don't extend into your driveway where neighborhood children might accidentally set one off.
Yes, this can be counted towards the cost
(d) Cost of the course you took at the community college to qualify as a missile maker so you could win the government contract.
No, it's a sunk cost
(e) Cost of the math courses you took years ago which turned out to be prerequisites for the course on missile making.
No, it's a sunk cost
(f) Cost of your elementary school education, since you wouldn't be able to manufacture missiles if you didn't know how to read.
No, it's a sunk cost
(g) Cost of the tetanus shot you received when you were three years old, which saved your life and thereby enabled you to become a successful defense contractor.
No, it's a sunk cost
(h) Cost of psychological counseling whereby you seek to overcome depression when your children scorn you as a member of the military-industrial complex.
This is the most amusing one, and, yes, it can be counted


In summary, you can pretty much count anything that happens after the contract was awarded as part of the cost, but anything that comes beforehand cannot be counted. (I don't know if this is an all-inclusive rule or not, but it works for this) I don't know how good of an example this is, but think of a grocery store and the food in it. The cost of the food has nothing to do with the cost of the store to build (though the profits that the store makes do go into helping pay for that, I'm sure).

[nicraM]

C, D and Ironically H.


Hot dog question:

The franks at the ball park are usually kosher, hebrew national or nathans. That is the main reason they taste better, cause they are. Also the factor of them being pricier sets off some subconscious thing where most associate quality with higher price.

[nicraM]

dammit, my first response was b,c and h.

I second guessed myself on b cause it seemed ridiculous. But then, h is about as ridiculous as it comes so I guess it makes sense.

[Shotgun Willy]

Heres another question, it's much more of an opinion question. There's really not a definite right answer (though there are definitely a few wrong ones, )

Should the causalities already incurred in a war be taken into account by a government in deciding whether it is in the national interest to continue the war? This is obviously not a trivial question. And it is a much more difficult question than you might at first suppose, especially for a government depending on popular support.


Also:

What differences would you expect to observe in the fees set by three young physicians just setting up practice if one financed her education by borrowing and must now make payments of $4000 per year for 15 years, another had his entire education paid for by his parents, and the third went all the way through on government-provided scholarships and grants?

[ᗅᗺᗷᗅ]

The casualties in a war are always a consideration for a government. Often, as casualties mount, public support for the war wanes (witness Vietnam and Iraq, for example). Since all governments need at least some degree of public approval in order to function effectively, the loss of support due to mounting casualties is very important. But where is the tipping point?

Well, partly that depends on the war. The last "good war" that the US fought was WW2, in which there was wide agreement across every stratum of society that the war was a necessary one. Why was that so? For several reasons. One was the nature of the enemy, which was, in the case of Nazi Germany, a regime that was palpably evil and almost universally considered to be threat. Another was the fact that the United States had been attacked at Pearl Harbor, so revenge was a factor. And, last but not least, with relatively few exceptions the history of US involvement in WW2 was a story of victory. Our objectives were clear, and we were perceived to be winning right from the beginning. Nothing succeeds like success!

In Vietnam and Iraq, by contrast, our objectives are fuzzy, and we have been widely perceived as either losing or just maintaining the status quo. That's a recipe for public discontent.

But there is another factor, too. If a nation has invested thousands of young men and women's lives on a war, they don't want to be seen to have thrown those lives away in vain. It becomes a matter of pride, which is unfortunate, because what inevitably ends up happening is that even more lives end up getting thrown away in the name of pride.

On the doctor issue:

First of all, I should point out that physicians' fees are set by the insurance companies, not by the physicians themselves. And no "young doctor" would be hanging out a shingle and opening their own practice. You need a minimum of 10 years in residency before you'd be ready for that, and even then the odds are overwhelming that you would be joining a large group practice, which would have some power to negotiate fees with the insurance companies, and not striking out on your own. The days of the independent country doctor are over.

But I understand that the question is meant to be about the economics, and not the reality of the medical delivery system in the United States. So I would say that all their fees should be the same. It's not up to the patients to subsidize the cost of that one doctor's education, and it's not their fault that the other doctors either had rich parents or scholarship eligibility. Besides, $4000 a year is not that much (around $335 per month). Compared to the cost of malpractice insurance it is miniscule. To my thinking that doctor should eat the cost. Yes, it means the other two will make $4000 more a year for a while, but your average general practitioner at that level (i.e. in a position to practice independently) makes about $150K per year, so it's not like we're talking about a huge amount in perspective.

[Shotgun Willy]

uh... yea, pretty much

[Lord Tyr]

well i was answering this till i say jorost's answers and they pretty much copied his lol so yea i just let it go.....

[Shotgun Willy]

I just remembered one more

If you lose a $20 bill, and you value your time at $5/hour, for how long is it worthwhile (economically speaking) for you to search for the $20 bill.

I'll give you a hint, the answer isn't 4 hours

[Invicta]

3 hours? At 4 hours you'd just break even if you found the bill. At 3 hours you still make $5 if you find the bill.

[Shotgun Willy]

lol

This sounds strange, but here's the answer

It is technically worthwhile to keep searching for the bill for however long you want, as long as you expect to find it within the next 4 hours

Even if you've been looking for 10 hours straight, as long as you expect to find it within the next 4 hours, it's technically worthwhile to keep looking, If you really did expect that, though, after 10 hours of searching, well, you're very optimistic

[Invicta]

That sort of makes sense, it assumes you're making an expected value assessment continuously, based on your expected time to find the bill. So it really comes down to optimism and will power.

[ᗅᗺᗷᗅ]

That's kind of dumb, if you ask me. How can you project how long it will take you to find something that's lost? That's like a boss telling his employees that he wants advance notice of any unplanned power outages.

[Invicta]

It probably depends on the area it's lost in. If I know it's in the car it should take less time to find it than if I know I left it somewhere in the mall.