Valley Seats and Cushions Student Coaching Notes 1

Valley Seats and Cushions: Student Coaching Notes 1

Valley Seats and Cushions n n Is bigger always better? Is there a scale at which this money-losing business could be viable? Are the lawyer’s claims economically plausible or are they flawed? Why? Use the data from the case (also found on the web page) to answer your questions 2

Nominal vs. Real Variables - 1 Price n n Nominal $ values are the actual prices at a given time Real $ values are those prices expressed in terms of a given year’s buying power— rather like “adjusting for exchange rates” but instead of pesos for dollars, it’s 2008 prices for 1984 prices 3

Nominal vs. Real Variables - 2 Price n n For a given price index, Real Price x Index Value = Nominal Price Or, by algebra, Nominal Price / Real Price = Index Value 4

Nominal vs. Real Variables - 3 Interest Rates It’s a little different for interest rates: Let p denote the annual percentage change in the price index. This is the inflation rate, also the percentage decline in buying power of Nominal $ from one year to the next. 5

Nominal vs. Real Variables - 4 Interest Rates If “i” denotes the observed (nominal) interest rate and if “r” denotes the inflation adjusted (real) interest rate, then i r + p The real interest rate plus how any lost buying power due to inflation is approximately the observed nominal interest rate. 6

Nominal vs. Real Variables – 5 Present Value n n The present value of an amount expressed in nominal dollars should generally be taken using a nominal interest rate The present value of an amount expressed in real dollars, so expressed in “pure buying power without inflation”, should generally be taken using a real interest rate 7

Is there an optimal business size? Graphing a profit measure, in this case earnings before taxes, against units produced may indicate the shape of the profit function. From that, one might determine an optimal level of output. 8

Some Statistics Review: n Mean: The simple arithmetic average (a measure of central tendency): The sum of a bunch of numbers divided by how many numbers there are. n Median: The 50 th percentile (also called the midpoint, the value in the middle). The median is useful when there are “outliers” in the data which might distort the “measure of central tendency”. (Example: suppose one of the students in your group earns $1, 000 per year. The mean income of your group probably would not be reflective of most of you, while the median would be. ) 9

Some Legal Concepts - 1 Duty to Mitigate: n n A party injured by a breach of contract may not recover for any amount of damages they could have avoided with reasonable efforts. When one party perceives that the other has breached or will breach the contract, the injured party must try to prevent unnecessary losses or risk not being able to recover for such losses. 10

Some Legal Concepts - 2 Punitive Damages: n Define/Purpose n Awarded under what circumstances? n Applicable in this case? 11

Some Legal Concepts - 3 n Contingency attorneys are usually paid a percentage (often 40%) of any damages (including punitive damages) awarded to the plaintiff 12