Canoga Sporting Goods, Inc.:
Student Coaching Notes
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Canoga Sporting Goods
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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
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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
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Nominal vs. Real Variables - 2
Price
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For a given price index,
Real Price x Index Value = Nominal Price
Or, by algebra,
Nominal Price / Real Price = Index Value
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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.
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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.
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Nominal vs. Real Variables – 5
Present Value
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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
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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.
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Some Statistics Review:
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Mean: The simple arithmetic average (a measure of
central tendency): The sum of a bunch of numbers divided
by how many numbers there are.
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Median: The 50th 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 $1,000,000 per year. The mean
income of your group probably would not be reflective of
most of you, while the median would be.)
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Some Legal Concepts - 1
Duty to Mitigate:
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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.
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Some Legal Concepts - 2
Punitive Damages:
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Define/Purpose
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Awarded under what circumstances?
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Applicable in this case?
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Some Legal Concepts - 3
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Contingency attorneys are usually paid a
percentage (often 40%) of any damages
(including punitive damages) awarded to
the plaintiff
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