03 Jun Question This is an individual assignment. You must work alone, and turn in your own work.
Question
This is an individual assignment. You must work alone, and turn in your own work.
1. Please provide definitions, in your own words, for Ordinary Least Squares regression,
sample mean, standard error, and t-
statistic.
2. Please provide an explanation of how you interpret the coefficients in Ordinary Least
Squares regression. Make sure you include explanations related to sign and magnitude.
3. Please explain the terms dependent variable and independent variable in Ordinary Least
Squares Regression.
4. Suppose that you are performing Ordinary Least Squares regression analysis related to
income, number of years on the job, and number of years of education. Yearly income, in
thousands of dollars, is the dependent variable. Number of years on the job (JOBYRS) and
number of years of education (EDUCYRS) are the independent variables.
The results from the regression are: Income = 27 –
4.45(JOBYRS) + 6.85(EDUYRS)
(.27) (.89) (.52)
a. Please provide an intuitive interpretation of this output.
b. Does the regression equation (and its estimated coefficients) make economic sense?
Explain.
c. Based on the regression output, discuss the statistical validity of the equation.
d. Suppose we expect number of years on the job to fall by 10%, and number of years of
education to increase by 20%. What is the predicted change in income?
5. A chemical company uses large amounts of shredded steel scrap metal in its production
processes. Most of this scrap comes from 12-
ounce beverage cans (soft-
drink and beer
cans). On behalf of the company, you are responsible for forecasting the availability (and
price) of this type of scrap over the next decade.
a. What kinds of information would you need to make such a forecast?
b. What factors demographics, economic, technological, or political might be important
in your projection? Which could you most easily predict? Which would be highly
uncertain?
6. What is the difference between Price Elasticity of Demand and Income Elasticity of
Demand? Please explain, in your own words, what is meant by Cross-
Price Elasticities.
7. How might information related to price elasticity of demand be used by a company?
8. a. General Motors (GM) produces light trucks in several Michigan factories, where its annual
fixed costs are $180 million, and its marginal cost per truck is approximately $20,000.
Regional demand for the trucks is given by: P = 30,000 0.1Q, where P denotes price in
dollars and Q denotes annual sales of trucks. Find GMs profit-
maximizing output level and
price. Find the annual profit generated by light trucks.
b. GM is getting ready to export trucks to several markets in South America. Based on
several marketing surveys, GM has found the elasticity of demand in these foreign markets
to be Ep = –
9 for a wide range of prices (between $20,000 and $30,000). Please provide an
intuitive interpretation of this finding.
The additional cost of shipping (including paying some import fees) is about $800 per truck.
One manager argues that the foreign price should be set at $800 above the domestic price,
in part (a), to cover the transportation cost. Do you agree that this is the optimal price for
foreign sales? Justify your answer.
c. GM also produces an economy (no frills) version of its light truck at a marginal cost of
$12,000 per vehicle. However, at the price set by GM, $20,000 per truck customer demand
has been very disappointing. GM has recently discontinued production of this model but
still finds itself with an inventory of 18,000 unsold trucks. The best estimate of demand for
the remaining trucks is P = 30,000 Q. One manager recommends keeping the price at
$20,000; another favors cutting the price to sell the entire inventory. What price (one of
these or some other price) should GM set and how many trucks should it sell? Justify your
answer.
9. A New Hampshire resort offers year-
round activities: in winter, skying and other cold-
weather activities; and in summer, golf, tennis, and hiking. The resorts operating costs are
essentially the same in winter and summer. Management charges higher nightly rates in the
winter, when its average occupancy rate is 75 percent, than in the summer, when its
occupancy rate is 85 percent. Can this policy be consistent with profit maximization?
Explain.
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