Question ECO 550 Week 1 Chapter 1 and 2 ECO 550 WEEK 1 CHAPTER

ECO 550 Week 1 Chapter 1 and 2

ECO 550 WEEK 1 CHAPTER 1 (EX.2,3,4) AND CHAPTER 2 (EX.1, 5, 6)

Chapter 1: Exercises 2, 3, and 6

2. Explain several dimensions of the shareholder-principal conflict with manager-agents known as the principal-agent problem. To mitigate agency problems between senior executives and shareholders, should the compensation committee of the board devote more to executive salary and bonus (cash compensation) or more to long-term incentives? Why? What role does each type of pay play in motivating managers?

3. Corporate profitability declined by 20 percent from 2008 to 2009. What performance percentage would you use to trigger executive bonuses for that year? Why? What issues would arise with hiring and retaining the best managers?

6. In the context of the shareholder wealth-maximization model of a firm, what is the expected impact of each of the following events on the value of the firm? Explain why.

Chapter 2: Exercises 1, 5, and 6

1. For each of the determinants of demand in Equation 2.1, identify an example illustrating the effect on the demand for hybrid gasoline-electric vehicles such as the Toyota Prius. Then do the same for each of the determinants of supply in Equation 2.2. In each instance, would equilibrium market price increase or decrease? Consider substitutes such as plug-in hybrids, the Nissan Leaf and Chevy Volt, and complements such as gasoline and lithium ion laptop computer batteries.

5. Two investments have the following expected returns (net present values) and standard deviation of returns:

PROJECT EXPECTED RETURNS STANDARD DEVIATION

A $ 50,000 $ 40,000

B $250,000 $125,000

6. The manager of the aerospace division of General Aeronautics has estimated the price it can charge for providing satellite launch services to commercial firms. Her most optimistic estimate (a price not expected to be exceeded more than 10 percent of the time) is $2 million. Her most pessimistic estimate (a lower price than this one is not expected more than 10 percent of the time) is $1 million. The expected value estimate is $1.5 million. The price distribution is believed to be approximately normal.

ECO 550 Week 2 Chapter 3 and 4

ECO 550 WEEK 2 CHAPTER 3(P-3,4,7) AND 4(P-5,6,7)

Chapter 3: Problems 3, 4, and 7

3. The Olde Yogurt Factory has reduced the price of its popular Mmmm Sundae from $2.25 to $1.75. As a result, the firm’s daily sales of these sundaes have increased from 1,500/day to 1,800/day. Compute the arc price elasticity of demand over this price and consumption quantity range.

4. The subway fare in your town has just been increased from a current level of 50 cents to $1.00 per ride. As a result, the transit authority notes a decline in rider-ship of 30 percent.

a. Compute the price elasticity of demand for subway rides.

b. If the transit authority reduces the fare back to 50 cents, what impact would you expect on the ridership? Why?

7. In an attempt to increase revenues and profits, a firm is considering a 4 percent increase in price and an 11 percent increase in advertising. If the price elasticity of demand is ?1.5 and the advertising elasticity of demand is +0.6, would you expect an increase or decrease in total revenues?

Chapter 4: Problems 5, 6, and 7

5. General Cereals is using a regression model to estimate the demand for Tweetie Sweeties, a whistle-shaped, sugar-coated breakfast cereal for children. The following (multiplicative exponential) demand function is being used:

6. The demand for haddock has been estimated as log + b log P + c log I + d log Pm

where of haddock sold in New England per pound of haddock

measure of personal income in the New England region

index of the price of meat and poultry

a. Determine the price elasticity of demand.

b. Determine the income elasticity of demand.

c. Determine the cross price elasticity of demand.

d. How would you characterize the demand for haddock? Apparently the Haddock is plentiful since it a white fish. New England has lots of ocean access to fish.

e. Suppose disposable income is expected to increase by 5 percent next year.

7. An estimate of the demand function for household furniture produced the following results:

1.08 .16 -.48

Y R P

where expenditures per household

personal income per household

of private residential construction per household

of the furniture price index to the consumer price index

a. Determine the point price and income elasticities for household furniture.

b. What interpretation would you give to the exponent for R? Why do you suppose R was included in the equation as a variable?

c. If you were a supplier to the furniture manufacturer, would you have preferred to see the analysis performed in physical sales units rather than dollars of revenue? How would this change alter the interpretation of the price coefficient, presently estimated as ?0.48?

ECO 550 Week 3 Chapter 5 and 6

ECO 550 WEEK 3 CHAPTER 5 (1,5,6,9) & CHAPTER 6 (2,7,9,10)

Chapter 5

1. The forecasting staff for the Prizer Corporation has developed a model to predict sales of its air-cushioned-ride snowmobiles. The model specifies that sales S vary jointly with disposable personal income Y and the population between ages 15 and 40, Z, and inversely with the price of the snowmoblies P. Based on past data, the best estimate of this relationship is *YZ/P where k has been estimated (with past data) to equal 100.

a. If Y = $11,000, Z = $1,200, and P = $20,000, what value would you predict for S ?

b. What happens if P is reduced to $17,500?

c. How would you go about developing a value for k?

d. What are the potential weaknesses of his model?

5. A firm experienced the demand shown in the following table.

year —— actual demand—- 5 yr moving avg — 3 yr moving avg– exponential smoothing — exponential smoothing ( ) — ( ) _________________________________________________________________________________________________ 2000 | 800 | xxxx | xxxx | xxxx | xxxxx 2001 | 925 | xxxx | xxxx | _____ | __________ 2002 | 900 | xxxx | xxxx | ______ | __________ 2003 | 1025 | xxxx | _____ | ________ | ___________ 2004 | 1150 | xxxx | ______ | _________ | ____________ 2005 | 1160 | _____ | _______ | __________ | _____________ 2006 | 1200 | _______ | _______ | __________ | ____________ 2007 | 1150 | _______ | ________ | ___________ | ____________ 2008 | 1270 | ________ | ________ | ___________ | ____________ 2009 | 1290 | _________ | ________ | ____________ | ___________ 2010 | * | _________ | _________ | ____________ | ____________ Unknown future value to be forecast.

a. Fill in the table by preparing forecasts based on a five- year moving average, a three- year moving average, and exponential smoothing( with a and a ). Note: The exponential smoothing forecasts may be begun by assuming Yt+

b. Using the forecasts from 2005 through 2009, compare the accuracy of each of the forecasting methods based on the RMSE criterion.

c. Which forecast would you have used for 2010? Why?

6. The economic analysis division of Mapco Enterprises has estimated the demand function for its line of weed trimmers as ,000 + 0.4N – 350Pm + 90Ps where of new homes completed in the primary market area of the Mapco trimmer of its competitor’s Surefire trimmer In 2010, 15,000 new homes are expected to be completed in the primary market area. Mapco plans to charge $50 for its trimmer. The Surefire trimmer is expected to sell for $55.

a. What sales are forecast for 2010 under these conditions?

b. If its competitor cuts the price of the Surefire trimmer to $50, what effect will this have on Mapco’s sales?

c. What effect would a 30 percent reduction in the number of new homes completed have on Mapco’s sales ( ignore the impact of the price cut of the Surefire trimmer)?

9. Savings-Mart (a chain of discount department stores) sells patio and lawn furniture. Sales are seasonal, with higher sales during the spring and summer quarters and lower sales during the fall and winter quarters. The company developed the following quarterly sales forecasting model:

+ 0.125t 2.75D1t + 2.25D2t + 3.50D3t

Where sales ($ million) in quarter t

sales ($ million) when

period (quarter) where the fourth quarter of First quarter of , second quarter of ,. . .

for first-quarter observations 0 otherwise

for second quarter observations 0 otherwise

for third-quarter observations 0 otherwise

Forecast Savings-Mart s sales of patio and lawn furniture for each quarter of 2010.

Chapter 6

2. If the U.S. dollar were to appreciate substantially, what steps could a domestic manufacturer such as Cummins Engine Co. of Columbus, Indiana take in advance to reduce the effect of the exchange rate fluctuation on company profitability?

7. If Boeing aircraft prices in dollars increase 20 percent and the yen/dollar exchange rate declines 15 percent, what effective price increase is facing Japan Airlines for the purchase of a Boeing 747? Would Boeing’s margin likely rise or fall if the yen then depreciated and competitor prices were unchanged? Why?

9. If unit labor costs in Spain and Portugal rise, but unit labor costs in Germany decline and other producer prices remain unchanged, what effect should these factors by themselves have on export trade and why?

10. What three factors determine whether two economies with separate fiscal and monetary authorities should form a currency union? Give an illustration of each factor using NAFTA economies.

ECO 550 WEEK 4 CHAPTERS 7 AND 8

Chapter 7

In the deep creek mining company described in this chapter table 7.1 suppose again that labor is the variable input and capital is the fixed input. Specifically, assume that the firm owns a piece of equipment having a 500-bhp rating. A. Complete the following tableLabor input L(#of workers

Total production TPL (=Q)

Marginal Product (MPL)

Average Product APL

1

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