Case Analysis (Assignment CIA-2-B)

Managerial Economics, MBA-132

What is seen and what is not seen: What Rancho Should Do?

Case
Rancho is a 1st year student at the CHRIST Deemed to be University-Lavasa Campus,
Pune. He is enrolled in the program of MBA, where he is attending a class of Managerial
Economics being taught by Prof. Ravikian. He is enthusiastic about economics as his
discovers day by day that it is a body of knowledge that can be also used in day-to-day
life, not just in what professors call “fundamental research”.

His father, Phunsukh, runs his own business. This is a restaurant specialized in Italian
recipes called Bella Italia. Phunsukh is a well gifted Chef who amassed his initial capital
after working eight years in Italy. There, he also refined his skills that he developed both
in family and in working at different employers. Currently, he owns the premises of the
restaurant (which is a house in the old quarter of the town, inherited from a relative).
He has eight employees but he keeps his job as the main Chef, even if he has two other
aides which allows him the luxury of being absent some days. He invested the equivalent
of 100,000 Rupees both in renovation and as working capital.

This evening, Phunsukh is satisfied that his business, according to his accountant, has
experienced in the last year a gross profit of 50,000 Rupees. That is, more than 4,000 Ru-
pees per month as personal income. He challenges his son on how important is learning
economics at the university as opposed to the experience derived from “doing business”
as entrepreneur, even if a small one.

Rancho responds: Father, would let me know more about your your business?
Of course, Rancho. Ask me anything.
Which are your main assets?
The building, the working capital and my hands proudly answered Phunsukh.
We learned that each firm is a bundle of assets. And each asset has an opportunity cost,
that is, a rent that could be got from allocating it towards other uses.
So what does it means, Rancho? Let’s do a simple exercise. How much does the
pharmacy next to your restaurant pays as a rent?
Why does it matter for the profitability of my business? I own the premises of my
business. You’ll see!
Around 5,000 Rupees a month. How much does Shiva, your friend from Bangalore,
earn as chef at the restaurant of the big transnational hotel chain in our town?
Around 2,000 Rupees a month.
Father, you use in your business two assets, you and the house you own, that do not
appear in the booking records, that is, neither in the balance sheet nor in your profit and
loss statement.
So what?
Just from these two assets you should earn at least 7,000 a month. And if you also
take into account the capital you invested in, around 100,000 Rupees, and its abandoned
return of, how much, 3.5% a year? that would means, in general terms, around 10,000
Rupees a month as gross profit. That is, around 120,000 Rupees a year, that correct?
Hm, pretty correct.

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Managerial Economics MBA 132 August 8, 2020

The fact that we do not put some assets into our book-keeping records does not mean
that they do not have a cost. It is called opportunity cost, father.
How could you introduce in your profit and loss account some costs that you do not
incur?
Obviously, you cannot. But that is the accounting perspective. Economics is not about
adding and subtracting but about an entire approach to how we are acting as individuals
and businessmen . . . in fact, to auction even more, economics tells us that you are
engaged in an process of consumption of approximately 70,000 Rupees a year.
This is a pretty strong word.
It surely is. The core questions now are: why don’t you rent your house to the pharmacist
and get a job together with Shiva ?
No, Rancho. That’s because I love my job and my father, that is, your grandfather, and
his father were cooks. I love my job. Some economists would argue that keeping your
business running is an irrational choice.
Now I can challenge their rationality.
How, father?
The fact that I am not maximizing my profits, as you said, does not mean that I am not
rational. I choose running my own business because I like it. And the house we use as
premises for the restaurant, I do not consume his value. By contrary, I conserve it. And
I hope that someday the profits would be so great as to satisfy also all your professors of
economics.
Rancho is smiling but also thinking: What should I do in his place?

Questions
1. Should businessmen always take into account only accounting expenses or they
should pay attention to other forgone opportunities?

2. Is an accounting profit always a mark of an economically profitable business?

3. Please explain why is so important for businessmen to stay alert to the dynamics
of the prices of their inputs and outputs?

4. Do you think there is a conflict between short term and long term objectives of a
businessman?

5. Does “rational” always means “profit seeking”? What do you think should be the
standards of “rationality” in business decisions?

Reference
International Journal of Management Cases, 2015 - Volume 17 Issue 2, pp-12 ***

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