ECON 4325 - Managerial Economics Mid Term

Emma uses a linear model to forecast quarterly same-store sales at the local Garden Center. The results of her multiple regression is:

ANSWER: e

Receiving $100 at the end of the next three years is worth more to me than receiving $260 right now, when my required interest rate is 10%.

False

The coefficient of determination measures the proportion of the variation in the independent variable that is "explained" by the regression line.

False

The correlation coefficient ranges in value between 0.0 and 1.0.

False

Suppose we estimate that the demand elasticity for fine leather jackets is -.7 at their current prices. Then we know that:

a 1% increase in price reduces quantity sold by .7%.

Suppose a plot of sales data over time appears to follow an S-shape as illustrated below. Which of the following is likely that the best forecasting functional form to use for sales data above?

A cubic shape in T, using T-squared and T-cubed as variables, Sales = a + b T + cT2 + d T3.

Mr. Geppetto uses exponential smoothing to predict revenue in his wood carving business. He uses a weight of ω = .4 for the naïve forecast and (1-ω) = .6 for the past forecast. What revenue did he predict for March using the data below? Select closet answer.

a. 106.2

Novo Nordisk A/S, a Danish firm, sells insulin and other drugs worldwide. Activella, an estrogen and progestin hormone replacement therapy sold by Novo-Nordisk, is examined using 33 quarters of data Y = -204 + . 34X1 - .17X2 (17.0) (-1.71) Where Y is quarterly sales of Activella, X1 is the Novo's advertising of the hormone therapy, and X2 is advertising of a similar product by Eli Lilly and Company, Novo-Nordisk's chief competitor. The parentheses contain t-values. Addition information is: Durbin-Watson = 1.9 and R2 = .89.

a. Both X1 and X2 are statistically significant.

An example of a time series data set is one for which the:

a. data would be collected for a given firm for several consecutive periods

Consider the following multiplicative demand function where QD = quantity demanded, P = selling price, and Y = disposable income:QD=1.6P^-13Y^2 The coefficient of Y (i.e., .2) indicates that (all other things being held constant):

a. for a one percent increase in disposable income, quantity demanded would increase by .2 percent

The type of economic indicator that can best be used for business forecasting is the:

a. leading indicator

Even though insignificant explanatory variables can raise the adjusted R2 of a demand function, one should not interpret their effects on the regression when

a. testing marketing hypotheses about the determinants of demand

The standard deviation is appropriate to compare the risk between two investments only if

a. the expected returns from the investments are approximately equal

Consider an investment with the following payoffs and probabilities: State of the Economy Probability Return Stability .50 1,000 Good Growth .50 2,000 Determine the expected return for this investment.

b. 1,500

The number of standard deviations z that a particular value of r is from the mean ? can be computed as z = (r - ?)/ σ. Suppose that you work as a commission-only insurance agent earning $1,000 per week on average. Suppose that your standard deviation of weekly earnings is $500. What is the probability that you earn zero in a week? Use the following brief z-table to help with this problem.

b. 2.28% chance of earning nothing in a week

Regarding demand and supply, which of the following statements is NOT correct?

b. Demand expresses intentions, but supply does not

One commonly used test in checking for the presence of autocorrelation when working with time series data is the ____.

b. Durbin-Watson test

The use of quarterly data to develop the forecasting model Yt = a +bYt−1 is an example of which forecasting technique?

b. Time-series forecasting

In regression analysis, the existence of a significant pattern in successive values of the error term constitutes:

b. autocorrelation

The marginal decision rule will be replaced with the net present value rule when:

b. costs are incurred immediately

The variation in an economic time-series which is caused by major expansions or contractions usually of greater than a year in duration is known as:

b. cyclical variation

When using a multiplicative power function (Y = a X1b1X2b2X3b3) to represent an economic relationship, estimates of the parameters (a, and the b's) using linear regression analysis can be obtained by first applying a ____ transformation to convert the function to a linear relationship.

b. double-logarithmic

Consider the following linear demand function where QD = quantity demanded, P = selling price, and Y = disposable income: QD = −36 −2.1P + .24Y The coefficient of P (i.e., −2.1) indicates that (all other things being held constant):

b. for a one unit increase in price, quantity demanded would decline by 2.1 units

Generally, investors expect that projects with high expected net present values also will be projects with

b. high risk

Which of the following barometric indicators would be the most helpful for forecasting future sales for an industry?

b. leading economic indicators. c. coincident economic indicators.

An increase in each of the following factors would normally provide a subsequent increase in quantity demanded, except:

b. level of competitor advertising

When two or more "independent" variables are highly correlated, then we have:

b. multicollinearity

The estimated slope coefficient (b) of the regression equation (Ln Y = a + b Ln X) measures the ____ change in Y for a one ____ change in X.

b. percentage, percent

Empirical estimates of the price elasticity of demand [in Table 3.4] suggest that the demand for household consumption of alcoholic beverages is:

b. price inelastic

If the cross price elasticity measured between items A and B is positive, the two products are referred to as:

b. substitutes

The net present value of an investment represents

b. the expected contribution of that investment to the goal of shareholder wealth maximization

When there is multicollinearity in an estimated regression equation,

b. the t-statistics are likely to be small even though the R2 is large.

All of the following are criteria used to select a forecasting technique EXCEPT:

b. the time required to complete the model

Caution must be exercised in using regression models for prediction when:

b. the value of the independent variable lies outside the range of observations from which the model was estimated

When demand is ____ a percentage change in ____ is exactly offset by the same percentage change in ____ demanded, the net result being a constant total consumer expenditure.

b. unit elastic; price; quantity

Which is NOT true about the coefficient of determination?

c. If the R-square is above 50%, the regression is considered significant.

Two investments have the following expected returns (net present values) and standard deviations: PROJECT Expected Value Standard Deviation Q $100,000 $20,000 X $50,000 $16,000 Based on the Coefficient of Variation, where the C.V. is the standard deviation dividend by the expected value.

c. Project X is riskier than Project Q

Demand is given by QD = 620 - 10·P and supply is given by QS = 100 + 3·P. What is the price and quantity when the market is in equilibrium?

c. The price will be $40 and the quantity will be 220 units.

An closest example of a risk-free security is

c. U.S. Government Treasury bills

Examine the plot of data. It is likely that the best forecasting method for this plot would be:

c. a seasonal pattern that can be modeled using dummy variables or seasonal adjustments

Time-series forecasting models:

c. are based solely on historical observations of the values of the variable being forecasted

Based on risk-return tradeoffs observable in the financial marketplace, which of the following securities would you expect to offer higher expected returns than corporate bonds?

c. common stock

For studying demand relationships for a proposed new product that no one has ever used before, what would be the best method to use?

c. consumer surveys, where potential customers hear about the product and are asked their opinions

Those goods having a calculated income elasticity that is negative are called:

c. inferior goods

In which of the following econometric problems do we find Durbin-Watson statistic being far away from 2.0?

c. multicollinearity

A price elasticity (ED) of −1.50 indicates that for a ____ increase in price, quantity demanded will ____ by ____.

c. one percent; decrease; 1.50 percent

An income elasticity (Ey) of 2.0 indicates that for a ____ increase in income, ____ will increase by ____.

c. one percent; quantity demanded; two percent

Factors affecting the price elasticity of demand include all of these EXCEPT:

c. positioning as income inferior

Songwriters and composers press music companies to lower the price for music downloads because

c. songwriter royalties are a percentage of sales revenue

Consumer expenditure plans is an example of a forecasting method. Which of the general categories best described this example?

c. survey techniques and opinion polling

In testing whether each individual independent variables (Xs) in a multiple regression equation is statistically significant in explaining the dependent variable (Y), one uses the:

c. t-test

A study of expenditures on food in cities resulting in the following equation: Log E = 0.693 Log Y + 0.224 Log N where E is Food Expenditures; Y is total expenditures on goods and services; and N is the size of the family. This evidence implies:

c. that a one-percent increase in family size increases food expenditures .224%

The primary difference(s) between the standard deviation and the coefficient of variation as measures of risk are:

c. the coefficient of variation is a measure of relative risk whereas the standard deviation is a measure of absolute

The constant or intercept term in a statistical demand study represents the quantity demanded when all independent variables are equal to:

d. 0.0

The approximate probability of a value occurring that is greater than one standard deviation from the mean is approximately (assuming a normal distribution)

d. 15.87%

An investment advisor plans a portfolio your 85 year old risk-averse grandmother. Her portfolio currently consists of 60% bonds and 40% blue chip stocks. This portfolio is estimated to have an expected return of 6% and with a standard deviation 12%. What is the probability that she makes less than 0% in a year? [A portion of Appendix B1 is given below, where z = (x - μ)/σ , with μ as the mean and σ as the standard deviation.]

d. 30.85%

In a cross section regression of 48 states, the following linear demand for per-capita cans of soda was found: Cans = 159.17 - 102.56 Price + 1.00 Income + 3.94Temp Coefficients Standard t Stat Error Intercept 159.17 94.16 1.69 Price -102.56 33.25 -3.08 Income 1.00 1.77 0.57 Temperature 3.94 0.82 4.83 R-Sq = 54.1% R-Sq(adj) = 51.0% From the linear regression results in the cans case above, we know that:

d. As price rises for soda, people tend to drink less of it

Property taxes are the product of the tax rate (T) and the assessed value (V). The total property tax collected in your city (P) is: P = T•V. If the value of properties rise 4% and if Mayor and City Council reduces the property the tax rate by 2%, what happens to the total amount of property tax collected?

d. It rises 2 %

Regarding forecasting, which of the following statements is NOT true?

d. Public administrators and managers of NFP corporations need not forecast, since they need not make a profit.

Identify the reasons why the quantity demanded of a product increases as the price of that product decreases.

d. a and b

Seasonal variations can be incorporated into a time-series model in a number of different ways, including:

d. a and b only

An increase in the quantity demanded could be caused by:

d. all of the above

If one defines incremental cost as the change in total cost resulting from a decision, and incremental revenue as the change in total revenue resulting from a decision, any business decision is profitable if:

d. all of the above

In addition to prediction, one purpose of regression analysis is:

d. b and c

The forecasting technique which attempts to forecast short-run changes and makes use of economic indicators known as leading, coincident or lagging indicators is known as:

d. barometric technique

The ____ is the ratio of ____ to the ____.

d. coefficient of variation; standard deviation; expected value

The factor(s) which cause(s) a movement along the demand curve include(s):

d. decrease in price of the good demanded

Marginal revenue (MR) is ____ when total revenue is maximized.

d. equal to zero

Goods having a negative calculated income elasticity are...

d. inferior goods

When demand elasticity is ____ in absolute value (or ____), an increase in price will result in a(n) ____ in total revenues.

d. less than 1; inelastic; increase

Demand functions in the multiplicative form are most common for all of the following reasons except:

d. marginal impact of a unit change in an individual variable is constant

The form of economics most relevant to managerial decision-making within the firm is:

d. microeconomics

The level of an economic activity should be increased to the point where the ____ is zero.

d. net marginal benefit

If two alternative economic models are offered, other things equal, we would

d. select the model that gave the most accurate forecasts

The standard deviation of the error terms in an estimated regression equation is known as:

d. standard error of the estimate

Which of the following would tend to make demand INELASTIC?

d. the proportion of the budget spent on the item is very small

Appendix: The Identification Problem in the development of a demand function is a result of:

d. the simultaneous relationship between the demand and supply functions

Durable goods are:

d. those that may be stored and repaired

Smoothing techniques are a form of ____ techniques which assume that there is an underlying pattern to be found in the historical values of a variable that is being forecast.

d. time-series forecasting

Using a sample of 100 consumers, a double-log regression model was used to estimate demand for gasoline. Standard errors of the coefficients appear in the parentheses below the coefficients. Ln Q = 2.45 -0.67 Ln P + . 45 Ln Y - .34 Ln Pcars (.20) (.10) (.25)

e. All of the coefficients are insignificant.

In a regression equation, one may measure the accuracy of the estimation by:

e. a and b only

Which of the following best represents management's objective(s) in utilizing demand analysis?

e. a and c

The assumptions underlying the simple linear regression model are:

e. a through c

Sources of positive net present value projects include

e. a, b, and c

The presence of association between two variables does not necessarily imply causation for the following reason(s):

e. a, b, and c

Variations in a time-series forecast can be caused by:

e. a, b, and c

Which of the following demand factors are under the control of management?

e. all except c

Select the correct statement.

e. all of the above are correct.

The principal econometric techniques used in measuring demand relationships are:

e. both b and c

In regression analysis, the existence of a high degree of intercorrelation among some or all of the explanatory variables in the regression equation constitutes:

e. multicollinearity

Auto dealers slash prices at the end of the model year in response to deficient demand/excess inventory but restaurants facing the same problem slash production because

e. price elasticity of supply in autos is smaller than the absolute value of price elasticity of demand but the reverse is true for restaurants

If demand were inelastic, then we should immediately:

e. raise the price.

In this problem, demonstrate your knowledge of percentage rates of change of an entire demand function (HINT: %ΔQ = EP•%ΔP + EY•%ΔY). You have found that the price elasticity of motor control devices at Allen-Bradley Corporation is -2, and that the income elasticity is a +1.5. You have been asked to predict sales of these devices for one year into the future. Economists from the Conference Board predict that income will be rising 3% over the next year, and AB's management is planning to raise prices 2%. You expect that the number of AB motor control devices sold in one year will:

e. rise .5%.

Consider an investment with the following payoffs and probabilities: State of the Economy Probability Return GDP grows slowly .70 1,000 GDP grow fast .30 2,000 Let the expected value in this example be 1,300. How do we find the standard deviation of the investment?

e. σ = √ { (.7)(1000-1300)2 + (.3)(2000-1300)2 }

Simplified trend models are generally appropriate for predicting the turning points in an economic time series.

false

A change in the level of an economic activity is desirable and should be undertaken as long as the marginal benefits exceed the ____.

marginal costs

In the first-order exponential smoothing model, the new forecast is equal to a weighted average of the old forecast and the actual value in the most recent period.

true

A linear demand for lake front cabins on a nearby lake is estimated to be: QD = 900,000 - 2P. What is the point price elasticity for lake front cabins at a price of P = $300,000? [HINT: Ep = (∂Q/∂P)(P/Q)]

EP=-2.0

The coefficient of determination ranges in value between 0.0 and 1.0.

True

The demand for durable goods tends to be more price elastic than the demand for non-durables.

True