Risk Analysis

At the dawn of the new millennium, stock-market speculators scrambled to bet their hard-earned money on Amazon.com, Cisco Systems, Yahoo , and others poised to take advantage of the Internet. Speculators piled into a handful of stock-market favorites at unheard of valuations, only to see a significant chunk of their portfolios vanish as the Internet bubble burst. Within 18 months, the S& P 500 crumbled by more than 30 percent and Nasdaq crashed by more than 70 percent. Many dot.com investors...

Programming

Linear programming, or so-called solver PC software, can be used to figure out the best answer to an assortment of questions expressed in terms of functional relationships. In a fundamental sense, linear programming is a straightforward development from the more basic what if approach to problem solving. In a traditional what-if approach, one simply enters data or a change in input values in a computer spreadsheet and uses spreadsheet formulas and macros to calculate resulting output values. A...

Correlation Analysis

In analyzing a model's forecast capability, the correlation between forecast and actual values is of substantial interest. The formula for the simple correlation coefficient, r, for forecast and actual values, f and x, respectively, is where of is the covariance between the forecast and actual series, and Uf and ux are the sample standard deviations of the forecast and actual series, respectively. Basic spreadsheet and statistical software readily provide these data, making the calculation of r...

Figure

The F Distribution with 4 and 30 Degrees of Freedom (for a Regression Model with an Intercept Plus Four X Variables Tested over 35 Observations) The F distribution is skewed to the right but tends toward normality as both numbers of degrees of freedom become very large. where, once again, n is the number of observations (data points) and k is the number of estimated coefficients (intercept plus the number of slope coefficients). Notice that this t statistic measures the size of an individual...

Managerial Application 151

The real key to creating corporate wealth is to apply a market-based approach to capital budgeting. The power of the market-based capital budgeting concept stems from the fact that managers cannot know if an operation is really creating value for the corporation until they calculate and apply the true cost of capital to all assets employed. To grow the company in a value-maximizing manner, the firm must weigh the answers to two important questions. Question No. 1 What is the true cost of...

Is Monopoly Always

Natural monopoly presents something of a dilemma. On the one hand, economic efficiency could be enhanced by restricting the number of producers to a single firm. On the other hand, monopolies have an incentive to underproduce and can generate unwarranted economic profits. Nevertheless, it is important to recognize that monopoly is not always as socially harmful as sometimes indicated. In the case of Microsoft Corp., for example, the genius of Bill Gates and a multitude of research associates...

Regression Statistics

Just a few years ago, the process of estimating economic relations was painstaking and costly. Only the largest and most advanced organizations could afford the necessary investment in sophisticated computers and highly trained staff. Today, powerful desktop personal computers (PCs) with sophisticated but user-friendly statistical software make the estimation of even complex economic relations both quick and easy. As a result, the accurate estimation of statistical relations has become a...

Present Value Of An Annuity

Suppose that you were offered the following alternatives a 3-year annuity of 1,000 per year or a lump-sum payment today. You have no need for the money during the next 3 years, so if you accept the annuity, you would simply deposit the receipts in a savings account paying 4 interest. How large must the lump-sum payment be to make it equivalent to the annuity The time line shown in Figure A.4 will help explain the problem. The present value of the first receipt is R 1 (1 + i) , the second is R 1...

Determinants of Supply

To illustrate, consider the automobile industry example discussed previously and assume that the supply function has been specified as follows (4.7) Q b1P + b2PSUV + b3W + b4S + b5 E + b6 i This equation states that the number of new domestic automobiles supplied during a given period (in millions), Q, is a linear function of the average price of new domestic cars (in ), P average price of new sport utility vehicles (SUVs) (in ), PSUV average hourly price of labor (wages in per hour), W average...

Perfect Competition and Monopoly

Firms operating in perfectly competitive industries find it very difficult to sustain attractive rates of return on investment. Take newsprint production, for example. When the economy is booming, newspapers are able to attract lots of advertisers and the demand for newsprint soars. During recessions, advertising falls as does the demand for newsprint. As the demand for newsprint rises and falls with trends in the overall economy, newsprint prices oscillate wildly. Because newsprint is a...

Problems

Publicly funded lighthouses provide a valuable service along coastal waterways and in the Great Lakes Region. Through visual light-beam signals, lighthouses mark the route of safe passage for cargo ships and pleasure craft 24 hours per day, 365 days per year. The service provided by such lighthouses is an often-cited classic example of a public good. Once a lighthouse is built, it can send signals to additional cargo ships and pleasure craft at practically...

Selftest Problems And Solutions

Medical Testing Labs, Inc., provides routine testing services for blood banks in the Los Angeles area. Tests are supervised by skilled technicians using equipment produced by two leading competitors in the medical equipment industry. Records for the current year show an average of 27 tests per hour being performed on the Testlogic-1 and 48 tests per hour on a new machine, the Accutest-3. The Testlogic-1 is leased for 18,000 per month, and the Accutest-3 is leased at...

Illustration Of Monopolistically Competitive Equilibrium

The process of price output adjustment and the concept of equilibrium in monopolistically competitive markets can be further illustrated by the following example. Assume that the Skyhawk Trailer Company, located in Toronto, Ontario, owns patents covering important design features of its Tomahawk II, an ultralight camping trailer that can safely be towed by high-mileage subcompact cars. Skyhawk's patent protection has made it very difficult for competitors to offer similar ultralight trailers....

Selected References

Achee, Rebecca, Thornton and Peter Thompson. Learning from Experience and Learning from Others An Exploration of Learning and Spillovers in Wartime Shipbuilding. American Economic Review 91 (December 2001) 1350-1368. Angrist, Joshua D., and Alan B. Krueger. Instrumental Variables and the Search for Identification From Supply and Demand to Natural Experiments. Journal of Economic Perspectives 15 (Fall 2001) 69-87. Baily, Martin Neal, and Robert Z. Lawrence. Do We Have a New E-Conomy American...

Info

Use the regression model approach to estimate the simple linear relation between the natural logarithm of GDP and time (T) over the 1966-99 subperiod, where and In GDPt is the natural logarithm of GDP in year t, and T is a time trend variable (where T1966 1, T1967 2, T1968 3, . . . , and T1995 30) and u is a residual term. This is called a constant growth model because it is based on the assumption of a constant percentage growth in economic activity per year. How well does the constant...

General Risk Categories

Business risk is the chance of loss associated with a given managerial decision. Such losses are a normal by-product of the unpredictable variation in product demand and cost conditions. Business risk must be dealt with effectively it seldom can be eliminated. In a globally competitive environment with instant communication, managers face a wide variety of risks. For managers, a main worry is something called market risk, or the chance that a portfolio of investments can lose money because of...

AOLTime Warner Is Playing Games with Stockholders

AOL-Time Warner, Inc., the world's largest media and entertainment company, was created through the merger of America Online, Inc., with Time Warner, a company that is best known as the publisher of magazines such as Fortune, Time, People, and Sports Illustrated. The company is a media powerhouse comprised of Internet technologies and electronic commerce (America Online), cable television systems, filmed entertainment and television production, cable and broadcast television, recorded music and...

Riddles In Pricing Practice

As this chapter illustrates, economic reasoning is a powerful tool that can be used to understand and improve pricing practices. For example, popular markup pricing methods can be interpreted as an efficient rule-of-thumb approach toward setting profit-maximizing prices. Similarly, multiple-unit pricing methods, like two-part pricing and bundle pricing, are efficient means for capturing additional profits when the value of goods and services varies from one consumer to another. Still, it would...

Limitations of Linear Cost VolumeProfit Analysis

Cost-volume-profit analysis helps explain relations among volume, prices, and costs. It is also useful for pricing, cost control, and other financial decisions. However, linear cost-volume-profit analysis has its limitations. Linear cost-volume-profit analysis has a weakness in what it implies about sales possibilities for the firm. Linear cost-volume-profit charts are based on constant selling prices. To study profit possibilities with different prices, a whole series of charts is necessary,...

Government Guaranteed Oligopoly

The Federal National Mortgage Association and the Federal Home Loan Mortgage Corp., or Fannie Mae and Freddie Mac, enjoy immense benefits from being government-sponsored entities that are also for-profit, publicly traded stockholder-owned corporations. Both are huge and highly profitable, despite the fact that they operate in a relatively simple and low-risk business. Fannie and Freddie purchase billions in home mortgages from thrifts and other financial institutions every year. Most of these...

Using the Dual Solution to Solve the Primal

The dual solution does not indicate optimal amounts of X and Y. It does, however, provide all the information necessary to determine the optimum output mix. The dual solution shows that input C does not impose a binding constraint on output of X and Y. Further, it demonstrates that n n* 108 at the optimum output of X and Y. The dual solution also offers evidence on the value of primal constraint slack variables. To see this, recall the three constraints in the primal problem Constraint on A 4QX...

Derived Demand

Goods and services are sometimes acquired because they are important inputs in the manufacture and distribution of other products. The outputs of engineers, production workers, sales staff, managers, lawyers, consultants, office business machines, production facilities and equipment, natural resources, and commercial airplanes are all examples of goods and services demanded not for direct consumption but rather for their use in providing other goods and services. Their demand is derived from...

Characteristics of Wonderful Businesses

Interesting perspectives on the characteristics of wonderful businesses are given by legendary Wall Street investors T. Rowe Price and Warren E. Buffett. The late T. Rowe Price was founder of Baltimore-based T. Rowe Price and Associates, Inc., one of the largest no-load mutual fund organizations in the United States, and the father of the growth stock theory of investing. According to Price, attractive growth stocks have low labor costs, superior research to develop products and new markets, a...

Gross Domestic Product 19662000

Branded Products, Inc., based in Oakland, California, is a leading producer and marketer of household laundry detergent and bleach products. About a year ago, Branded Products rolled out its new Super Detergent in 30 regional markets following its success in test markets. This isn't just a me too product in a commodity market. Branded Products' detergent contains Branded 2 bleach, a successful laundry product in its own right. At the time of the introduction,...

In the Services Sector

The measurement and enhancement of worker productivity is an important challenge facing all managers. Productivity enhancement is vital given the role of labor as a key input in the production of goods and services and in light of the generally increasing vigor of domestic and import competition. Of course, before incentives to enhance worker productivity can be introduced, the multiple dimensions of worker productivity must be made explicit and accurately measured. Management must be able to...

Managerial Application 154

Capital Allocation at Berkshire Hathaway, Inc. Warren E. Buffett, chairman and CEO of Berkshire Hathaway, Inc., has the uncommon ability to communicate management insights in a disarmingly modest and humorous fashion. Among his most important lessons are the following It is far better to buy a wonderful company at a fair price than a fair company at a wonderful price. In a difficult business, no sooner is one problem solved than another surfaces. There is never just one cockroach in the...

LP Pension Funding Model

Several companies have learned that a well-funded and comprehensive employee benefits package constitutes an important part of the compensation plan needed to attract and retain key personnel. An employee stock ownership plan, profit-sharing arrangements, and deferred compensation to fund employee retirement are all used to allow productive employees to share in the firm's growth and development. Among the fringe benefits offered under the cafeteria-style benefits plans is comprehensive medical...

Estimating the Costs of Nursing Care

Cost estimation and cost containment are an important concern for a wide range of for-profit and not-for-profit organizations offering health care services. For such organizations, the accurate measurement of nursing costs per patient day (a measure of output) is necessary for effective management. Similarly, such cost estimates are of significant interest to public officials at the federal, state, and local government levels. For example, many state Medicaid reimbursement programs base their...

Price Elasticity And Marginal Revenue

There are simple, direct relations between price elasticity, marginal revenue, and total revenue. It is worth examining such relations in detail, given their importance for pricing policy. Varying Elasticity at Different Points on a Demand Curve All linear demand curves, except perfectly elastic or perfectly inelastic ones, are subject to varying elasticities at different points on the curve. In other words, any linear demand curve is price elastic at some output levels but inelastic at others....

2015 Managirail Economic

Indicate whether each of the following statements is true or false, and explain why. A. In long-run equilibrium, every firm in a perfectly competitive industry earns zero profit. Thus, if price falls, none of these firms will be able to survive. B. Perfect competition exists in a market when all firms are price takers as opposed to price makers. C. A natural monopoly results when the profit-maximizing output level occurs at a point where long-run average costs...

Limitations of Concentration Ratios and HHI Information

Despite the obvious attraction of census concentration ratios and HHI data as useful information on the number and size distribution of current competitors, it is prudent to remain cautious in their use and interpretation. Important limitations must be recognized. By not appreciating these limitations, one might make fundamental errors in judging the vigor of competition within industries. A major drawback of concentration ratio and HHI information is that they take a long time to collect and...

Pricing Practices in the Denver Colorado Newspaper Market

On May 12, 2000, the two daily newspapers in Denver, Colorado, filed an application with the U.S. Department of Justice for approval of a joint operating arrangement. The application was filed by The E.W. Scripps Company, whose subsidiary, the Denver Publishing Company, published the Rocky Mountain News, and the MediaNews Group, Inc., whose subsidiary, the Denver Post Corporation, published the Denver Post. Under the proposed joint operating agreement, printing and commercial operations of both...

Estimating Unit Sales Revenue in the Restaurant Industry

The restaurant industry is one of the largest and most competitive service industries in the United States. According to the National Restaurant Association, the restaurant industry features 844,000 independent units that generate approximately 388 billion in annual sales revenue, or roughly 460,000 per unit per year. Restaurants are the nation's largest private-sector employer, with 11.3 million employees. Many of the most successful restaurants are public entities. For example, http...

Use of the Standard Normal Concept An Example

Suppose that the Martha Stewart Realty is considering a boost in advertising to reduce a large inventory of unsold homes. Management plans to make its media decision using the data shown in Table 14.4 on the expected success of television versus newspaper promotions. For simplicity, assume that the returns from each promotion are normally distributed. If the television promotion costs 2,295 and the newspaper promotion costs 4,013, what is the probability that each will generate a profit To...

Present Value Of An Uneven Series Of Receipts

The definition of an annuity includes the words fixed amount in other words, annuities involve situations in which cash flows are identical in every period. Although many managerial decisions involve constant cash flows, some important decisions are concerned with uneven cash flows. Consequently, it is necessary to deal with varying payment streams. The PV of an uneven stream of future income is found as the sum of the PVs of the individual components of the stream. For example, suppose that we...

Es 207010 Plan

GE routinely identifies the top 20 percent, the middle 70 percent, and the bottom 10 percent of its 100,000 managerial and professional employees. According to Jack Welch, legendary former chairman of GE, the top 20 percent and middle 70 percent often trade places, but the bottom 10 percent tend to remain there. At GE, those employees found in the bottom 10 percent are given a chance to improve. However, if performance doesn't improve quickly, they had better find...

Price Output Determination

Suppose that Midwest State University MSU wants to reduce the athletic department's operating deficit and increase student attendance at home football games. To achieve these objectives, a new two-tier pricing structure for season football tickets is being considered. A market survey conducted by the school suggests the following market demand and marginal revenue relations PP 225 - 0.005QP PS 125 - 0.00125QS MRP ATRP AQP 225 - 0.01QP MRS ATRS AQS 125 - 0.0025QS From these market demand and...

Competitive Strategy in Perfectly Competitive Markets

Competitive strategy is the search for a favorable competitive position and durable above-normal profits in an industry or line of business. In perfectly competitive industries, above-normal returns sometimes reflect economic luck, or temporary good fortune due to unexpected changes in industry demand or cost conditions. For example, during 2001 many small to mid-size oil refineries and gasoline retailers benefited greatly when oil prices unexpectedly shot up following temporary oil shortages....

How Are Economic Markets Measured

An economic market consists of all individuals and firms willing and able to buy or sell competing products during a given period. The key criterion in identifying competing products is similarity in use. Precise determination of whether a specific good is a distinct economic product involves an evaluation of cross-price elasticities for broad classes of goods. When cross-price elasticities are large and positive, goods are substitutes for each other and can be thought of as competing products...

Demand and Supply

Around the globe, 24 hours per day, impossible-to-regulate currency markets set prices for the U.S. dollar, Japanese yen, and the European Economic and Monetary Union's euro. Much to the chagrin of sovereign governments and their official representatives, minute-by-minute variations in currency prices are wholly determined by the converging forces of supply and demand. For example, U.S. stock markets plunged an unprecedented 684.81 points on Monday, September 17, 2001, following the resumption...

Optimal Pricing Policy Example

The simple relation between marginal revenue, price, and the point price elasticity is very useful in the setting of pricing policy. To see the usefulness of Equation 5.10 in practical pricing 2 In calculus notation, marginal revenue is the derivative of the total revenue function. That is, MR _ dTR dQ. Because total revenue equals price times quantity TR _ P X O , marginal revenue is found by taking the derivative of the function P X Q with respect to Q Because price and quantity are...

Q

N - 5 9002 6,000 900 - 1,012,500 For Storrs, average cost minimization involves operation at an activity level that lies between those indicated by profit maximization and revenue maximization strategies. Because average Information Brought Down the Berlin Wall The most important ingredient for a well-functioning company, and a free market economy, is information that is accurate, timely, and inexpensive. In November 1989, the world got a renewed sense of how powerful economic information can...

Summary

Product demand is a critical determinant of profitability, and demand estimates are key considerations in virtually all managerial decisions. This chapter considers methods for quantifying and interpreting demand relations. Elasticity is the percentage change in a dependent variable, Y, resulting from a 1 percent change in the value of an independent variable, X. Point elasticity measures elasticity at a point on a function. Arc elasticity measures the average elasticity over a given range of a...

Basic Economic Relations

Tables are the simplest and most direct form for presenting economic data. When these data are displayed electronically in the format of an accounting income statement or balance sheet, the tables are referred to as spreadsheets. When the underlying relation between economic data is simple, tables and spreadsheets may be sufficient for analytical purposes. In such Analytical expression of functional relationships instances, a simple graph or visual representation of the data can provide...

Theory Of The Firm

At its simplest level, a business enterprise represents a series of contractual relationships that specify the rights and responsibilities of various parties see Figure 1.2 . People directly involved include customers, stockholders, management, employees, and suppliers. Society is also involved because businesses use scarce resources, pay taxes, provide employment opportunities, and produce much of society's material and services output. Firms are a useful device for producing and distributing...

Ebitda

Earnings before interest, taxes, depreciation, and amortization EBITDA minus the cost of essential new plant and equipment As shown in Equation 15.14, EVA is an accounting-based measure of the net profit contribution earned after adjusting accounting earnings for noncash expenses and the cost of capital employed by the firm or division. Like NPV analysis, firm or divisional activity adds value when EVA gt 0 firm or divisional activity destroys value when EVA lt 0. Value maximization requires...

Macroeconomic Growth And Stabilization Policy

Macroeconomic policies shape the environment within which households and businesses make decisions. These policies are also important tools used to pursue the goals of economic growth, full employment, and stable purchasing power for the national currency. Economic growth increases social welfare because it leads to improved living standards. Such progress is fostered by an economic environment that includes fee markets, well-designed and efficient regulation where necessary, and legal...

Maximin Decision Rule

One decision standard that is sometimes applicable for decision making under uncertainty is the maximin criterion.4 This criterion states that the decision maker should select the alternative that provides the best of the worst possible outcomes. This is done by finding the worst possible minimum outcome for each decision alternative and then choosing the option whose worst outcome provides the highest maximum payoff. This criterion instructs one to maximize the minimum possible outcome. To...

The Network Television Fin Syn Regulation Controversy

When viewers think of FCC regulation of network television, they often think of censorship or of the FCC controlling the renewal of local broadcast licenses. Although TV censors are the butt of frequent jokes by David Letterman on CBS's Late Show and Jay Leno on NBC's The Tonight Show, TV censorship in the United States is very mild when compared to that in many foreign countries, and it has little economic or political impact. Although more important, FCC control over the renewal of local...

Input Demand and Optimal Output

Using the firm's demand curve for micromotors and total profit function, it is now possible to calculate the optimal output price and profit levels n - 0.0004 80,0002 96 80,000 - 2 16 80,000 - 1,810,000 750,000 From this example, it becomes clear that the optimal level of employment can be derived by calculating the profit-maximizing level of output and then determining the amount of labor required to produce that output level. In the earlier Tax Advisors, Inc., example, the point where MRPL PL...

Goodness of Fit r and R2

In a simple regression model with only one independent variable the correlation coefficient, r, measures goodness of fit. The correlation coefficient falls in the range between 1 and -1. If r 1, there is a perfect direct linear relation between the dependent Y variable and the independent X variable. If r -1, there is a perfect inverse linear relation between Y and X. In both instances, actual values for Yt all fall exactly on the regression line. The regression equation explains all of the...

Set Up A Spreadsheet To Illustrate The Effects Of Changing Economic Assumptions On The Demand For Sunbest Orange Juice.

Demand and supply functions for Sunbest orange juice can be combined with data on the operating environment to construct estimates of demand, supply, and the amount of surplus or shortage under each operating scenario. A. Set up a table or spreadsheet to illustrate the effects of changing economic assumptions on the demand for Sunbest orange juice. Use the demand function to calculate demand based on three different underlying assumptions concerning changes in the operating environment. First,...

Illustration of Optimal Input Proportions

The Tax Advisors, Inc., example can further illustrate these relations. Assume that in addition to three CPAs, four bookkeepers are employed at a wage including fringes of 15 per hour and that MPB 4 0.3. This compares with a CPA wage of 35 per hour and MPcpa 3 1.4. Based on these assumptions, the marginal product per dollar spent on each input is 0.02 Units per Dollar for bookkeepers Such an input combination violates the optimal proportions rule because the ratios of marginal products to input...

Graphic View of the Compounding Process Growth

Figure A.1 shows how 1 or any other initial quantity grows over time at various rates of interest. The higher the rate of interest, the faster the rate of growth. The interest rate is, in fact, the growth rate If a sum is deposited and earns 5 , then the funds on deposit grow at the rate of 5 per period. Similarly, the sales of a firm or the gross domestic product GDP of a country might be expected to grow at a constant rate. Projections of future sales or GDP could be obtained using the...

Capital Budgeting Process

Management invests hundreds of billions of dollars per year in fixed assets. By their very nature, these investment decisions have the potential to affect a firm's fortunes over several years. A good decision can boost earnings sharply and dramatically increase the value of the firm. A bad decision can lead to bankruptcy. Effective planning and control is essential if the health and long-run viability of the firm is to be assured. Long-term investment planning process

Decision Trees

A decision tree is a sequential decision-making process. Decision trees are designed for analyzing decision problems that involve a series of choice alternatives that are constrained by previous decisions. They illustrate the complete range of future possibilities and their associated probabilities in terms of a logical progression from an initial decision point, through each subsequent constrained decision alternative, to an ultimate outcome. Decision points are instances where management must...

Capital Budgeting

Berkshire Hathaway, General Electric, and Johnson amp Johnson are standout performers in terms of the amount of wealth created for shareholders. What these diverse companies share is a common devotion to the capital budgeting process. They manage capital resources using two simple concepts 1 Funds employed in the business have a cost that must be paid, and 2 funds should be allocated where they generate the largest profit. For example, careful asset redeployment within the General Electric...

Social Net Present Value Analysis

If adequate public funds are available for all decision alternatives, the appropriate decision criterion must rank-order decision alternatives so that net social benefits are maximized. If public funds are inadequate to fund all desirable decision alternatives, the appropriate decision criterion must rank-order decision alternatives so that marginal social benefits are maximized per dollar of marginal social cost. Under the social net present-value SNPV criterion, marginal social benefits and...

Formulate The Linear Programming Problem That Dch Would Use To Minimize Its Total Labor Costs Per Month Showing Both

Identify and interpret the appropriate Syflansyd objective function. B. Using both inequality and equality forms, set up and interpret the resource constraints facing the Syflansyd Company. C. Calculate optimal daily profit, and provide a complete interpretation of the full solution to this linear programming problem. P9.4 Cost Minimization. Ray Barone is sole proprietor of Delmar Custom Homes DCH , a family-run construction company. The company uses two types of crews on its Long Island,...

Substitutes and Complements

The demand for beef is related to the price of chicken. As the price of chicken increases, so does the demand for beef consumers substitute beef for the now relatively more expensive chicken. On the other hand, a price decrease for chicken leads to a decrease in the demand for beef as consumers substitute chicken for the now relatively more expensive beef. In general, a direct relation between the price of one product and the demand for a second product holds for all substitutes. A price...

Output Elasticity and Returns to Scale

Even though graphic representations of returns to scale such as Figure 7.10 are intuitively appealing, returns to scale can be accurately determined for any production function through analysis of output elasticities. Output elasticity, eG, is the percentage change in output associated with a 1 percent change in all inputs and a practical means for returns to scale estimation. Letting X represent all input factors, g Percentage Change in Output Q Q Percentage Change in All Inputs X where X...

Degree Of Operating Leverage Untouchable Package Service

Over approximately what range of input X will marginal costs be falling if PX is not affected by the amount purchased B. At approximately what level of employment of input X will average variable costs be minimized C. If PX 25, what is the minimum average variable cost in this production system D. What is the marginal cost of production at 60 units of output E. If the price of output is 2 per unit, is employment of 3 units of X optimal for a profit-maximizing firm assuming again that X costs...

2. The First National Bank Received 3 000 Inquiries Following The Latest Advertisement Describing Its 30-month Ira

Assume that the quantity of X is fixed at 2 units. If output sells for 3 and the cost of Y is 120 per day, how many units of Y will be employed D. Assume that the company is currently producing 162 units of output per day using 1 unit of X and 3 units of Y. The daily cost per unit of X is 120 and that of Y is also 120. Would you recommend a change in the present input combination Why or why not E. What is the nature of the returns to scale for this production system if the optimal input...

Productivity Measurement

Productivity analysis and measurement is important at the company, industry, and economy-wide levels. For the overall economy, growing economic productivity makes possible improvements in the economic welfare of the general population. From the company's perspective, productivity betterment holds the key to growing profits and employee compensation. Rate of increase in output per unit of input Output relative to the combined inputs of labor, capital, and intermediate purchases

Optimal Input Combinations with Limited Resources

Frequently, firms faced with limited inputs during a production period find it optimal to use inputs in proportions other than the least-cost combination. To illustrate, consider the effect of limits on the quantities of L and K available in our example. Assume that only 20 units of L and 11 units of K are available during the current production period and that the firm seeks to maximize output of Q. These constraints are shown in Figure 9.4. The horizontal line drawn at L 20 indicates the...

Figure 710

Returns to Scale May Be Constant, Decreasing, or Increasing A straight-line production function indicates constant returns to scale, and a given percentage change in all inputs will cause the same percentage change in output. When the slope of such a line from the origin is falling, decreasing returns to scale are indicated. If the slope of such a line from the origin is rising, increasing returns to scale are revealed. If decreasing returns to scale are present, total output grows slower than...

P3-8 Simple Regression. The Environmental Controls Corporation Ecc Is A Multinational Manufacturer Of Materials

Note Number of firms pair-wise comparisons are shown in parentheses. Note Number of firms pair-wise comparisons are shown in parentheses. Data Source The Value Line Investment Survey for Windows, February 25, 2002 http www.valueline.com . Reproduced with the permission of Value Line Publishing, Inc. A. This correlation table only shows one-half of the pair-wise comparisons between these five growth measures. For example, it shows that the correlation between the 10-year rates of growth in sales...

Multiplant Economies and Diseconomies of Scale

Multiplant economies of scale are cost advantages that arise from operating multiple facilities in the same line of business or industry. Multiplant diseconomies of scale are cost disadvantages that arise from managing multiple facilities in the same line of business or industry. To illustrate, assume a U-shaped long-run average cost curve for a given plant, as shown in Figure 8.4. If demand is sufficiently large, the firm will employ n plants, each of optimal size and producing Q units of...

Y

Error Economics

531.90, because the standard error of the estimate is always in the same units as the dependent Y variable. There is a 95 percent probability that any given observation Yt will lie within roughly two standard errors of the relevant Yt estimate.2 For example, the number of new account applications during the month of July is 315 per month, and the expected or fitted total cost level is 6,993.19 586.4 20.339 315 . The corresponding confidence bounds for the 95 percent confidence interval are...

Q2

N - 36,000 700 300 - 0.5 3002 129,000 Note This is an average-cost minimum because average cost is rising for Q gt 300. D. Given downward-sloping demand and marginal revenue curves, and a U-shaped or quadratic AC function, the profit-maximizing price output combination will often be at a different price and production level than the average-cost minimizing price output combination. This stems from the fact that profit is maximized when MR MC, whereas average cost is minimized when MC AC....

Price Elasticity of Demand for Airline Passenger Service

Southwest Airlines likes to call itself the Texas state bird. It must be some bird, because the U.S. Transportation Department regards Southwest as a dominant carrier. Fares are cut in half and traffic doubles, triples, or even quadruples whenever Southwest enters a new market. Airport authorities rake in millions of extra dollars in landing fees, parking and concession fees soar, and added business is attracted to the local area all because Southwest has arrived Could it be that Southwest has...

Multiple Equation Systems

Economic relations that are true by definition Although forecasting problems can often be analyzed with a single-equation model, complex relations among economic variables sometimes require use of multiple-equation systems. Variables whose values are determined within such a model are endogenous, meaning originating from within those determined outside, or external to, the system are referred to as exogenous. The values of endogenous variables are determined by the model the values of exogenous...

P

Marginal revenues generated exceed the marginal cost of added production. Price elasticity information can be used to answer questions such as What is the expected impact on sales of a 5 percent price increase How great a price reduction is necessary to increase sales by 10 percent Given marginal cost and price elasticity data, what is the profit-maximizing price The importance of price elasticity information was illustrated during 2000-2001 in California when electric utilities were forced to...

Expansion Path

By connecting points of tangency between isoquants and budget lines points A, B, and C , an expansion path is identified that depicts optimal input combinations as the scale of production expands. At the point of optimal input combination, isocost and the isoquant curves are tangent and have equal slope. The slope of an isocost curve equals -PX PY. The slope of an isoquant curve equals the marginal rate of technical substitution of one input factor for another when the quantity of production is...

Exponential Smoothing Concept

Exponential smoothing is a method for forecasting trends in unit sales, unit costs, wage expenses, and so on. The technique identifies historical patterns of trend or seasonality in the data and then extrapolates these patterns forward into the forecast period. Its accuracy depends on the degree to which established patterns of change are apparent and constant over time. The more regular the pattern of change in any given data series, the easier it is to forecast. Exponential smoothing or...

Optimal Level of a Single Input

To illustrate how the marginal revenue product economic productivity is related to input use, consider the following question If the price of input X in the production system depicted in Table 7.4 is 12, how many units will the firm use Clearly, the firm will employ three units of X because the value gained by adding the first three units exceeds marginal cost. When three units of X are employed, the third unit causes total revenues to rise by 15 while costing only 12. At the margin, employing...

Income Elasticity Of Demand

For many goods, income is another important determinant of demand. Income is frequently as important as price, advertising expenditures, credit terms, or any other variable in the demand function. This is particularly true of luxury items such as big screen televisions, country club memberships, elegant homes, and so on. In contrast, the demand for such basic commodities as salt, bread, and milk is not very responsive to income changes. These goods are bought in fairly constant amounts...

Advantages of Econometric Methods

Econometric methods force the forecaster to make explicit assumptions about the linkages among the variables in the economic system being examined. In other words, the forecaster must deal with causal relations. This produces logical consistency in the forecast model and increases reliability. Another advantage of econometric methods is that the forecaster can compare forecasts with actual results and use insights gained to improve the forecast model. By feeding past forecasting errors back...

Comparative Statics Changing Demand and Supply

From this analysis of hypothetical automobile demand and supply relations, it is clear that interest rates are an important factor influencing demand and supply. Factors related to overall economic activity often have important influences on both demand and supply. Figure 4.7 illustrates the comparative statics of changing demand and changing supply conditions by showing the net effects of changing interest rates. Here S6 and D6 , both of which assume a 6 percent interest rate, yield an...

The Corrected Coefficient of Determination R2

As stated previously, an R2 of 100 percent results when each data point lies exactly on the regression line. Although one might think that any regression model with an R2 100 percent would prove highly reliable as a predictive device, this is not always true. The coefficient of determination for any regression equation is artificially high when too small a sample is used to estimate the model's coefficients. At the extreme, R2 always equals 100 percent when the number of estimated coefficients...

Trends in Economic Data

Forecasting by trend projection is predicated on the assumption that historical relationships will continue into the future. All such methods use time-series data. Weekly, monthly, or annual series of data on sales and costs, personal income, population, labor force participation rates, and GDP are all examples of economic time series. All time series, regardless of the nature of the economic variable involved, can be described in terms of a few important underlying characteristics. A secular...

Why Is Forecasting Useful

Managers sometimes must integrate quantitative and nonquantitative information in a way not easily modeled or characterized by numbers. In such instances, there is no substitute for the extraordinary pattern recognition capabilities of the human mind. Experienced managers sometimes know the correct level of inventory, or right price, despite their inability to easily explain all the factors that weigh in their decisions. Although there is no good substitute for the careful intuition of an...

Means Tests for Large Samples

The first step in hypothesis testing is to formally state the basic premise or null hypothesis, along with the converse premise or alternative hypothesis. The significance level of the test and the test statistic must then be determined, and the decision rule must be stated. Finally, data must be collected and the test must be performed so that an informed managerial decision can be made. The sample mean can be compared to the population mean to learn if any given sample is typical or atypical...

Market Equilibrium

Integrating the concepts of demand and supply establishes a framework for understanding how they interact to determine market prices and quantities for all goods and services. When quantity demanded and quantity supplied are in perfect balance at a given price, the product market is said to be in equilibrium. An equilibrium is stable when underlying demand and supply conditions are expected to remain stationary in the foreseeable future. When underlying demand and supply are dynamic rather than...

Types of Normal Goods

For most products, income elasticity is positive, indicating that demand rises as the economy expands and national income increases. The actual size of the income elasticity coefficient is very important. Suppose, for example, that ej _ 0.3. This means that a 1 percent increase in income causes demand for the product to increase by only .3 percent. Given growing national income over time, such a product would not maintain its relative importance in the economy. Another product might have ej _...

Marginal Rate of Technical Substitution

The marginal rate of technical substitution3 MRTS is the amount of one input factor that must be substituted for one unit of another input factor to maintain a constant level of output. Algebraically, 3 The term marginal rate of technical substitution is often shortened to marginal rate of substitution. The marginal rate of technical substitution usually diminishes as the amount of substitution increases. In Figure 7.5 c , for example, as more and more labor is substituted for cloth, the...

Forecasting Global Performance for a Mickey Mouse Organization

The Walt Disney Company is one of the best known and best managed entertainment companies in the world. As the cornerstone of a carefully integrated entertainment marketing strategy, the company owns and operates the world's most acclaimed amusement parks and entertainment facilities. Some of the best known and most successful among these are Disneyland, California, and Walt Disney World, Florida an immense entertainment center that includes the Magic Kingdom, Epcot Center, Animal Kingdom, and...

Production Analysis and Compensation Policy

Hiring the right workers, providing proper training, and offering them an effective incentive compensation package is tough because the ongoing relationship between employers and their employees is different from any other business affiliation. If a company buys a piece of land, for example, the terms of trade can be clearly set in advance. In the case of real estate, a mutually acceptable price is determined, a deed is delivered, and the transaction is completed. However, what works for real...

Economic Optimization Process

Effective managerial decision making is the process of arriving at the best solution to a problem. If only one solution is possible, then no decision problem exists. When alternative courses of action are available, the best decision is the one that produces a result most consistent with managerial objectives. The process of arriving at the best managerial decision is the goal of economic optimization and the focus of managerial economics. Choice alternative that produces a result most...

Budget Lines

Budget lines illustrated in Figure 7.8 are constructed in the following manner Let PX 500 and PY 250, the prices of X and Y. For a given budget, say, B1 1,000, the firm can purchase four units of Y 1,000 250 and no units of X, or two units of X 1,000 500 and none of Y. These two quantities represent the X and Y intercepts of a budget line, and a straight line connecting them identifies all combinations of X and Y that 1,000 can purchase. A budget line is merely a statement of the various...

Ap Q

Where AQ AP is the marginal change in quantity following a one-unit change in price, and P and Q are price and quantity, respectively, at a given point on the demand curve. The concept of point price elasticity can be illustrated by referring to Equation 5.3 Q 8,500 - 5,000P 3,500PV 150I 1,000A The coefficient for the price variable indicates the effect on quantity demanded of a one-unit change in price At the typical values of PV 3, I 40,000, and A 20,000, the demand curve is calculated as Q...

Input Demand Function

Data on the marginal revenue product of labor and wage rates present firms with clear incentives regarding the level of employment. If MRPL gt PL, it pays to expand labor usage when MRPl lt PL, it pays to cut back. When MRPL PL, the level of employment is optimal. When an unlimited supply of labor can be employed at a given wage rate, determining the optimal level of employment involves a simple comparison of MRPL and PL. However, when higher wages are necessary to expand the level of...

Marginal Analysis In Decision Making

Marginal analysis gives clear rules to follow for optimal resource allocation. As a result, geometric relations between totals and marginals offer a fruitful basis for examining the role of marginal analysis in managerial decision making. Use of Marginals in Resource Allocation The application of marginal analysis for resource allocation can be illustrated using the example of Payless Furniture, Inc., a San Francisco-based retailer. The company is faced with the important decision of how it...

Economic Indicators

Data that describe projected, current, or past economic activity Weighted average of leading, coincident, or lagging economic indicators Whereas cyclical patterns in most economic time series are erratic and make simple projection a hazardous short-term forecasting technique, a relatively consistent relation often exists among various economic variables over time. Even though many series of economic data do not exhibit a consistent pattern over time, it is often possible to find a high degree...

X

Means, Add together as t goes from 1 to n the values of the term on the right. For Equation 1.1, the process is as follows Let t 1 and find the value of the term n1 1 i 1, the present value of year 1 profit then let t 2 and calculate n2 1 i 2, the present value of year 2 profit continue until t n, the last year included in the analysis then add up these present-value equivalents of yearly profits to find the current or present value of the firm. Because profits n are equal to total revenues TR...

Linear and Growth Trend Comparison

The importance of selecting the correct structural form for a trending model can be demonstrated by comparing the sales projections that result from the two basic approaches that have been considered. Recall that with the constant change model, sales were projected to be 24.5 billion in 2005 and 31.6 billion in 2010. Compare these sales forecasts with projections of 158.1 billion in 2005 and 850.0 billion in 2010 for the constant growth rate model. Notice that the difference in the near-term...

Microeconomic Forecast Problems

In contrast with macroeconomic forecasting, microeconomic forecasting involves the prediction of disaggregate economic data at the industry, firm, plant, or product level. Unlike predictions of GDP growth, which are widely followed in the press, the general public often ignores microeconomic forecasts of scrap prices for aluminum, the demand for new cars, or production costs for Crest toothpaste. It is unlikely that the CBS Evening News will ever be interrupted to discuss an upward trend in...

Demand Estimation Example

An example of demand estimation can be used to illustrate how regression models are estimated or fitted by the method of least squares. Assume that monthly data have been assembled by Electronic Data Processing EDP , Inc., a small but rapidly growing firm that provides electronic data processing services to companies, hospitals, and other organizations. EDP's main business is to maintain and monitor payroll records on a contractual basis and issue payroll checks, W-2 forms, and so on, to the...

Means Tests for Small Samples

For meaningful statistical analysis, sample size must be sufficiently large to accurately reflect important characteristics of the overall population. Although it is typically desirable to have 30 or more sample observations, this is not always possible. Sometimes, managers must rely on very small samples of data, say n lt 30. In such instances, the test statistic formula must be altered slightly. If the population is normally distributed, the distribution around the small sample mean will be...

Relation Between Supply Curve and Supply Function

Like the relation between the demand curve and the demand function, the relation between the supply curve and the supply function is very important in managerial decision making. Figure 4.4 shows three supply curves for automobiles S6 , S8 , and S10 . S8 is the same automobile supply curve determined by Equations 4.9 and 4.10 and shown in Figure 4.3. If S8 is the appropriate supply curve, then 8 million automobiles would be offered for sale at an industry average price of 25,000. Only 4 million...