Acme Manufacturing is producing $4,060,000 worth of goods this year and expects

Question

Acme Manufacturing is producing $4,060,000 worth of goods this year and expects to sell its entire production. It also is planning to purchase $1,500,000 in new equipment during the year. At the beginning of the year, the company has $500,000 in inventory in its warehouse. Find actual investment and planned investment if:

  a. Acme actually sells $3,850,000 worth of goods.

  b. Acme actually sells $4,000,000 worth of goods.

  c. Acme actually sells $4,200,000 worth of goods.

find the actual investment and planned investment of a. b. and c.

Assuming that Acme’s situation is similar to that of other firms, in which of these three cases is output equal to short-run equilibrium output?

Case c

Case a

Case b

None

  a. Acme actually sells $3,850,000 worth of goods.

  b. Acme actually sells $4,000,000 worth of goods.

Explanation / Answer

Acme’s planned investment in every case is $1,500,000 because planned investment is equal to planned expenditure on new equipment plus zero planned increase in inventories.

a. If Acme sells $3,850,000 worth of goods, it has unplanned inventory investment of $210,000 and total actual investment of $1,710,000.

b. If Acme sells $4,060,000 worth of goods, its actual investment is $1,560,000.

c. If Acme sells $4,200,000 worth of goods it must draw down $200,000 worth of goods from its existing inventory, implying that inventory investment is –$140,000. Acme’s actual investment in this case is $1,500,000 – $140,000 = $1,360,000.

Output is similar to short-run equilibrium output in case (b), where planned spending and actual spending are nearly equal.

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