1. A doctor spent two weeks doing charity medical work in Mexico. In calculating her taxable income for the year, her accountant deducted as business expenses her round-trip airline ticket, meals, and a hotel bill for the two weeks stay. she was surprised to learn that the accountant following IRS rules, could not deduct as a cost of the trip the $8.000 of the income she lost by being absent from her medical practice for two weeks. She asked the accountant, "since lost income is not deductible as an expense, should I ignore it when I make my decision next year to go to Mexico for charity work" Can you give the doctor some advice on decision making?
2. Fortune magazine reported that SkyWest, an independent regional airline, negotiated a financial arrangement with Delta and United to provide regional jet service for the two major airlines. For its part of the deal, SkyWest agreed to paint its jets the colors of Delta Connection and United Express and to fly routes specified by the two airlines. In return, Delta and United agreed to pay SkyWest a predetermined profit margin and to cover most of the regional airline's costs. Fortune explained that while the deal limited the amount of profit SkyWest could earn, it also insulated the smaller airline from volatility in earnings since Delta and United covered SkyWest's fuel costs, increased its load factor (the percentage of seats occupied), and managed its ticket prices.
Fortune suggested that Wall Street liked the deal because SkyWest's market valuation increased from $143 million to $1.1 billion after it began its service with the two major airlines. Explain carefully how this arrangement with Delta and United could have caused the value of SkyWest to increase dramatically even though it limited the amount of profit SkyWest could earn.
3. Some Managers are known for their reliance on "practical " decision-making rules and processes, and they can be quite skeptical of decision rules that seem too theoretical to be useful in practice. While it may be true that some theoretical methods in economics can be rather limited in their practical usefulness, there is an important corollary to keep in mind: "If it doesn't work in theory, then it won't work in practice."( Hint: see "Some common Mistakes Managers Make")