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The University of Mount Olive (UMO) Expansion


The University of Mount Olive (UMO) has a new President, and he wants to evaluate how we are doing. Should UMO continue to expand, should we contract, are we the right size? We need to make some critical decisions. As a graduate student of this institution, you are asked to turn your reasoning powers on to Mount Olive’s expansion. First, UMO would like to know the extent to which we should expand. In other words, what is the optimal size of UMO, and how will we know if we are overextended? If we are looking at costs and profits, several issues arise which you will need to deal with. For example, what is the appropriate “cost” to use and, consequently what is the correct view of “profit”? With the expansion, you will need to look at the Law of Diminishing Marginal Returns and determine whether it applies to education, especially in an online format. How does the Law apply to students and to the hiring of new faculty? Furthermore, if Mount Olive hires adjuncts, what sort of agency problems might arise? How can they be best dealt with? Finally, we need to consider the long-term effects of expansion on UMO’s reputation. Specifically, what is the value of Mount Olive’s reputation today and in the future if there is over expansion? To whom is UMO’s reputation most valuable? How can the stakeholders help insure that the reputation is upheld? Consider these questions as well How should managers use and avoid the misuse of explicit costs, implicit costs and sunk costs? What is the most relevant cost to a manager? Why? Why is it important to distinguish between accounting profit and economic profit and then act in accordance with economic profit? Why do firms exist? How can owners overcome the Principal-Agent problem? When are firms oversized, undersized or optimally sized? 

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