Test Bank Chapter Economic Forecasting

CHAPTER 7FORECASTING
MULTIPLE CHOICE
1. A 5% growth trend with annual compounding:
a. is a direct estimate of the continuous rate of growth.
b. will result in lower final-period sales than would a 5% growth trend with continuous
compounding.
c. will result in greater final-period sales than would a 5% growth trend with continuous
compounding.
d. implies constant period-by-period unit change in an important economic variable over
time.
2. A forecast method based on the informed opinion of several individuals is called:

a. personal insight.
b. panel consensus.
c. the Delphi method.
d. qualitative analysis.
3. A rhythmic annual pattern in sales or profits is called:

a. cyclical fluctuation.
b. secular trend.
c. trend analysis.
d. seasonal variation.
4. Growth trend analysis assumes:

a. constant unit change over time.
b. irregular percentage change over time.
c. sporadic unit change over time.
d. constant percentage change over time.
5. Lagging economic indicators include:

a. personal income.
b. the change in stock prices.
c. orders for new plant and equipment.
d. the average duration of unemployment.
6. The Delphi method:

a. employs interaction among experts in the hope that resulting forecasts embody all
available objective and subjective information.
b. can be influenced by the forceful personality of one or a few key experts.
c. employs an independent party to elicit a consensus opinion.
d. assumes that several experts arrive at forecasts that are inferior to those that individuals
generate.
Presented by Suong Jian & Liu Yan, MGMT Panel , Guangdong University of Finance.
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7. A secular trend is the:

a. annual pattern in sales or profits caused by weather, habit, or social custom.
b. predictable shock to the pace of economic activity caused by wars, strikes, natural
catastrophes, and so on.
c. long-run pattern of increase or decrease in a series of economic data.
d. rhythmic variation in economic series that is due to expansion or contraction in the overall
economy.
8. Linear trend analysis assumes:

a. constant unit change in an important economic variable over time.
b. arithmetic dollar growth.
c. geometric dollar growth.
d. constant percentage change in an important economic variable over time.
9. The forecasting technique least-suited for short term projection is:

a. survey analysis.
b. barometric analysis.
c. time-series analysis of seasonal variations.
d. input-output analysis.
10. Which of the following forecasting methods is not qualitative?

a. survey techniques.
b. barometric method.
c. expert opinion.
d. delphi method.
11. Time-series methods:

a. use historical data as the basis for projection.
b. combine economic theory with mathematical and statistical tools to analyze economic
relations.
c. use inter-industry linkages to show how changes in the demand for one industry's output
will effect all sectors of the economy.
d. are based on opinion.
12. If an economic time series is growing by a constant dollar amount each period, the most accurate
forecast model is:
a. a constant rate of growth model.
b. an exponential growth model.
c. a linear model.
d. log-linear model.
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13. Social habits that produce an annual pattern in a time series result in:
a. cyclical fluctuation.
b. seasonal variation.
c. irregular or random influences.
d. secular trend.
14. Which of the following is a leading economic indicator?

a. average prime rate charged by banks.
b. commercial and industrial loans outstanding.
c. change in credit for business and consumer borrowing.
d. ratio of constant dollar inventories to sales for manufacture and trade.
15. Econometric methods:

a. combine economic theory with mathematical and statistical tools to analyze economic
relations.
b. project the direction, but not the magnitude of, changes in the variable of interest.
c. rely solely on historical data as the basis for projection.
d. use nonmarket data to project the effects of changes in economic variables.
16. A diffusion index that registers 40% indicates that:

a. leading indicators on average have fallen by 60%.
b. 40% of the leading indicators have fallen.
c. 60% of the leading indicators have fallen.
d. all leading indicators have risen by 40%.
17. Econometric forecasting methods:

a. require explicit assumptions about the relations among economic variables.
b. can estimate the direction, but not the magnitude, of change for forecasted variables.
c. can estimate the magnitude, but not the direction, of change for forecasted variables.
d. always remain the same from period to period.
18. The accuracy of an econometric forecast would be most questionable when the:
a. stochastic error term is small and randomly distributed.
b. stochastic error term is large and randomly distributed.
c. stochastic error term is large and not randomly distributed.
d. expected value of the stochastic error term equals zero.
19. A panel consensus formed by providing feedback without direct identification of individual positions
is called:
a. panel consensus.
b. qualitative analysis.
c. the Delphi method.
d. personal insight.
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20. Unpredictable shocks to the economic system are called:

a. random influences.
b. examples of seasonality.
c. cyclical fluctuations.
d. trend reversals.
21. A leading economic indicator of business cycle peaks is given by:

a. the average duration of unemployment.
b. the change in prices for consumer services.
c. personal income minus transfer payments.
d. an index of stock prices for 500 stocks.
22. Qualitative methods and market experiments work best for forecasting product:
a. introduction or start-up.
b. rapid growth.
c. maturity.
d. decline and abandonment.
23. Economic relations that are hypothesized to be true are called:

a. behavioral equations.
b. identities.
c. statistical equations.
d. statistical identities.
24. To predict the effects on a particular industry of changes in other sectors of the economy forecasters
should employ:
a. time series analysis.
b. input-output analysis.
c. barometric methods.
d. steamroller techniques.
25. Which of the following does not indicate the relative accuracy of an economic forecast?
a. composite index.
b. sample mean forecast error.
c. stochastic error term.
d. simple correlation coefficient.
PROBLEM
1. Annual Compounding. The following table shows annual sales data for Nanotechnology, Inc., over
the ten-year 1995-2005 period:
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Year
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Sales
($ Millions)
$1.0
1.1
1.2
1.2
1.3
1.4
1.5
1.9
2.0
2.5
2.6
A. Calculate the 1995-2005 growth rate in sales using the constant rate of change model with
annual compounding.
B.
Forecast sales for the years 2010 and 2015.
2. Annual Compounding. The following table shows annual sales data for Landrover, Inc., over the
ten-year 1995-2005 period:
Year
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Sales
($ Millions)
$ 4.0
4.8
5.6
6.4
7.0
7.6
8.4
9.2
10.2
11.2
12.4
annual compounding.
B.
Calculate 5-year and 10-year sales forecasts.
3. Annual Compounding. The following table shows annual sales data for Stuff Happens, Inc., over the
ten-year 1995-2005 period:
Year
1995
1996
Sales
($ Millions)
$2.0
2.2
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1997
1998
1999
2000
2001
2002
2003
2004
2005
2.4
2.6
2.8
3.0
3.2
3.5
3.8
4.1
4.3
annual compounding.
B.
4. Annual Compounding. The following table shows annual sales data for Security Watch, Inc., over
the ten-year 1995-2005 period:
Year
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Sales
($ Thousands)
$100
150
200
220
280
360
480
500
540
580
620
annual compounding.
B.
5. Continuous Compounding. Nicholas Nickelby, a quality control supervisor for Vinyl Windows, Inc.,
is concerned about an increase in distribution costs per unit from $10 to $13.80 over the last four years.
Nickelby feels that setting up a new direct-sales distribution network at a cost of $17.50 per unit may
soon be desirable.
A. Calculate the unit cost growth rate using the constant rate of change model with continuous
compounding.
B.
Forecast when unit distribution costs will exceed the current cost of direct-sales distribution.
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6. Continuous Compounding. Elizabeth Corday, a quality control supervisor for Surgery Products, Inc.,
is concerned about an increase in distribution costs for disposable syringes from $40 to $50 per case
over the last five years. Corday feels that setting up a new direct-sales distribution network at a cost of
$58.50 per unit may soon be desirable.
compounding.
B.
7. Continuous Compounding. Mark Greene, a control supervisor for County General, Inc., is concerned
about an increase in distribution costs per unit from $24.50 to $25 over the last four years. Greene
feels that setting up a new direct-sales distribution network at a cost of $27.50 per unit may soon be
desirable.
compounding.
B.
8. Continuous Compounding. Abby Lockheart, a quality control supervisor for Intensive care, Inc., is
concerned about an increase in distribution costs per unit from $3 to $3.27 over the last three years.
Lockheart feels that setting up a new direct-sales distribution network at a cost of $3.56 per unit may
soon be desirable.
compounding.
B.
9. Sales Forecast Modeling. The change in the quantity of product A demanded in any given week is
inversely proportional to the change in sales of product B in the previous week. That is, if sales of B
rose by X percent last week, sales of A can be expected to fall by X percent this week.
A. Write the equation for next week's sales of A, using the symbols A = sales of Product A, B =
sales of Product B, and t = time. Assume there will be no shortages of either product.
B.
Last week 500 units of A and 250 units of B were sold. Two weeks ago, 200 units of Product
B were sold. What would you predict the sales of A to be this week?
10. Sales Forecast Modeling. The change in the quantity of Beta service demanded in any given week is
inversely proportional to the change in sales by Alpha in the previous week. That is, if sales of Alpha
rose by X percent last week, sales of Beta can be expected to fall by 0.5X percent this week.
A. Write the equation for next week's sales of Beta, using the symbols B = sales of Beta
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services, A = Alpha sales, and t = time. Assume there will be no shortages of either product.
B.
Last week 200 units of Beta and 450 units of Alpha were sold. Two weeks ago, 300 units of
Alpha were sold. What would you predict the sales of Beta to be this week?
11. Sales Forecast Modeling. The change in the quantity of Cheez Sticks demanded in any given week is
inversely proportional to the change in sales of Pretzel Q's in the previous week. That is, if sales of
Pretzel Q's fell by X percent last week, sales of Cheez Sticks can be expected to rise by 2X percent this
week.
A. Write the equation for next week's sales of Cheez Sticks, using the symbols C = sales of
Cheez Sticks, Q = sales of Pretzel Q's, and t = time. Assume there will be no shortages of
either product.
B.
Last week 600 units of C and 350 units of Q were sold. Two weeks ago, 400 units of Q were
sold. What would you predict the sales of C to be this week?
12. Sales Forecast Modeling. The change in the quantity of product C demanded in any given week is
inversely proportional to the change in sales of product D in the previous week. That is, if sales of D
rose by X percent last week, sales of C can be expected to fall by X percent this week.
A. Write the equation for next week's sales of C, using the symbols C = sales of product C, D =
sales of product D, and t = time. Assume there will be no shortages of either product.
B.
Last week 750 units of C and 600 units of D were sold. Two weeks ago, 500 units of product
D were sold. What would you predict the sales of C to be this week?
13. Sales Forecast Modeling. Consulting Associates, Ltd., would like to generate a sales forecast based
on the assumption that next year sales are a function of current income, advertising, and advertising by
a competing retailer:
A. Write an equation for predicting sales based on the assumption that the percentage change in
sales is twice as large as the percentage change in income and advertising; but only one-half
as large as, and of the opposite sign of, the percentage change in competitor advertising. Use
the symbols S = sales, Y = income, A = advertising, and CA = competitor advertising.
B.
During the current year, sales total $500,000, income is $63,000 per capita, advertising is
$50,000, and competitor advertising is $100,000. Previous period levels were $60,000
(income), $40,000 (advertising), and $125,000 (competitor advertising). Forecast next year
sales.
14. Sales Forecast Modeling. Engineering Consultants, Inc., would like to generate a sales forecast based
on the assumption that next year sales are a function of current income, advertising, and advertising by
a competing manufacturer:
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sales is one-and-a-half as large as the percentage change in income and advertising; but only
one-half as large as, and of the opposite sign of, the percentage change in competitor
advertising. Use the symbols S = sales, Y = income, A = advertising, and CA = competitor
advertising.
B.
During the current year, sales total $750,000, income is $71,750 per capita, advertising is
sales.
15. Sales Forecast Modeling. Kerry Weaver, office manager for Pediatric Medicine, Ltd., would like to
generate a sales forecast based on the assumption that next year sales are a function of current income,
advertising, and advertising by a competing local hospital:
sales is three times as large as the percentage change in income and advertising; but only
one-fourth as large as, and of the opposite sign of, the percentage change in competitor
advertising.
B.
During the current year, sales total $1,000,000, local disposable income is $78,750 per
household, advertising is $90,000, and competitor advertising is $100,000. Previous period
levels were $75,000 (income), $80,000 (advertising), and $125,000 (competitor advertising).
Forecast next year sales.
16. Sales Forecast Modeling. Jeng-Mei Chen, Inc., an upscale Manhattan restaurant, would like to
generate a sales forecast based on the assumption that next year sales are a function of current income,
advertising, and advertising by a competing restaurant:
sales is twice as large as the percentage change in income and advertising; but only
one-fourth as large as, and of the opposite sign of, the percentage change in competitor
advertising.
B.
During the current year, sales total $2,000,000, income is $84,700 per capita, advertising is
sales.
17. Cost Forecast Modeling. Elliot Ness, manager of product packaging at Chicago Tool & Die, Inc., is
evaluating the cost effectiveness of the preventive maintenance program in his department. Ness
believes that the monthly downtime of the packaging line due to equipment breakdown is related to the
hours spent each month on preventive maintenance.
A. Write an equation to predict next month's downtime using the symbols D = downtime,
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M = preventive maintenance, t = time, a0 = constant term, a1 = regression slope coefficient,

and assuming that downtime in the forecast month decreases by the same percentage as
preventive maintenance increased during the preceding month.
B.
If 75 hours were spent last month on preventive maintenance and this month's downtime was
50 hours, what should downtime be next month if preventive maintenance this month is 90
hours? Use the equation developed in part A.
18. Cost Forecast Modeling. Robert Romano, CEO of Rocket Science, Inc., is evaluating the cost
effectiveness of the preventive maintenance program. Romano believes that the monthly downtime of
the accelerator line due to equipment breakdown is related to the hours spent each month on
preventive maintenance.
A. Write an equation to predict next month's downtime using the symbols D = downtime,
M = preventive maintenance, t = time, a0 = constant term, a1 = regression slope coefficient,
and assuming that downtime in the forecast month decreases by half of the percentage
increase in preventive maintenance during the preceding month.
B.
If 60 hours were spent last month on preventive maintenance and this month's downtime was
40 hours, what should downtime be next month if preventive maintenance this month is 75
hours? Use the equation developed in part A.
19. Cost Forecast Modeling. John Carter, an intern at Medical Products, Inc., is evaluating the cost
effectiveness of a training program in his department. Carter believes that the monthly rejection rate is
inversely related to the hours spent each month on worker training.
A. Write an equation to predict next month's rejection rate using the symbols R = rejection rate,
T = worker training, t = time, a0 = constant term, a1 = regression slope coefficient, and
assuming that the rejection rate in the forecast month decreases by twice the percentage
increase in worker training during the preceding month.
B.
If 40 hours were spent last month on worker training and this month's rejection rate was 60,
what should the rejection rate be next month if worker training this month is 50 hours? Use
the equation developed in part A.
20. Sales Forecasting. Samurai, Ltd., must forecast sales for a popular trivia game in order to avoid
stockouts or excessive inventory charges during the coming Christmas season. In percentage terms, the
company estimates that game sales fall at double the rate of price increases and grow at five times the
rate of customer traffic increases. Furthermore, these effects seem to be independent.
A. Write an equation for estimating the Christmas season sales, using the symbols S = sales,
P = price, T = traffic, and t = time.
B.
Forecast this season's sales if Samurai sold 10,000 games last season at $20 each, this
season's price is anticipated to be $25, and customer traffic is expected to rise by 10% over
previous levels.
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21. Sales Forecasting. The World Bazaar, Ltd., must forecast sales for indoor electric grills in order to
avoid stockouts or excessive inventory charges during the coming Christmas season. In percentage
terms, the company estimates that electric grill sales fall at triple the rate of price increases and grow at
three times the rate of customer traffic increases. Furthermore, these effects seem to be independent.
A. Write an equation for estimating the Christmas season sales, using the symbols S = sales,
P = price, T = traffic, and t = time.
B.
Forecast this season's sales if the World Bazaar sold 500,000 indoor electric grills last season
at $40 each, this season's price is anticipated to be $45, and customer traffic is expected to
rise by 15% over previous levels.
22. Simultaneous Equations. The Metropolitan Symphony in Toledo, Ohio, has had great success with a
"Senior Citizens' Night" promotion. By offering half off its regular $20 admission price, average
nightly attendance has risen from 4,000 to 6,000 persons. Beverage (B) and other concession (C)
revenues tied to attendance have also risen dramatically. Historically, Metropolitan Symphony has
found that 75% of all concert goers will buy a $3 beverage, whereas 10% of all concert goers plus 40%
of those buying beverages will spend $2 on hors d'oeuvres and other concessions.
A. Write an expression describing total revenue from tickets plus beverage plus other
concessions.
B.
Forecast total revenues for both regular and special senior citizens' night pricing.
C.
If the profit contribution is 25% on concert ticket revenues, and 75% on beverages and other
concession revenues, is the pricing promotion profitable?
23. Simultaneous Equations. Buckeye Cinema, Inc., which runs a chain of movie theaters in the state of
Ohio, has had great success with a "Tuesday Night at the Movies" promotion. By offering half off its
regular $8 admission price, average nightly attendance has risen from 400 to 800 persons. Popcorn
(Pop) and other concession (C) revenues tied to attendance have also risen dramatically. Historically,
Buckeye Cinema has found that 50% of all movie goers will buy a $4 cup of popcorn, whereas 25% of
all movie goers plus 50% of those buying popcorn will spend $3 on soda and other concessions.
A. Write an expression describing total revenue from tickets plus popcorn plus other
concessions.
B.
Forecast total revenues for both regular and special Tuesday-night pricing.
C.
If the profit contribution is 25% on movie ticket revenues, and 75% on popcorn and other
concession revenues, is the pricing promotion profitable?
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24. Simultaneous Equations. Macrosoft, Inc., based in Seattle, Washington, manufactures a wide range
of parts for the aircraft, automotive, and agricultural equipment industries. The company is currently
evaluating the merits of building a new plant in order to fulfill a new contract with the federal
government. The alternative to expansion is to use additional overtime, reduce other production, or a
combination of both. The company will add new capacity only if the economy appears to be expanding.
Forecasting the general economic activity of the United States is therefore an important input to the
decision making process. The firm has collected data and estimated the following relations for the U. S.
economy:
Last year's total profits (all corporations) Pt-1 = $800 billion
This year's government expenditures G = $2,480 billion
Annual consumption expenditures C = $800 billion + 0.75Y + u
Annual investment expenditures I = $1,200 billion + 0.9Pt-1
Annual tax receipts T = 0.2 GDP
National income Y = GDP - T
Gross domestic product GDP = C + I + G
A. Forecast each of the above variables through the simultaneous relations expressed in the
multiple equation system. Assume that all random disturbances average out to zero.
25. Simultaneous Equations. Gates Equipment, Inc., manufactures a wide range of parts for the
agricultural equipment industry. The company is currently evaluating the merits of building a new
plant in order to fulfill a new contract with a large export concern. The alternative to expansion is to
use additional overtime, reduce other production, or a combination of both. The company will add new
capacity only if the regional economy appears to be expanding. Forecasting the general economic
activity of the United States is therefore an important input to the decision making process. The firm
has collected data and estimated the following relations for the U. S. economy:
Last year's total profits (all corporations) Pt-1 = $1,400 billion
This year's government expenditures G = $2,800 billion
Annual consumption expenditures C = $800 billion + 0.8Y + u
Annual investment expenditures I = $950 billion + 0.75Pt-1
Annual tax receipts T = 0.25 GDP
National income Y = GDP - T
Gross domestic product GDP = C + I + G
A. Forecast each of the above variables through the simultaneous relations expressed in the
multiple equation system. Assume that all random disturbances average out to zero.
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CHAPTER 7FORECASTING

2. A forecast method based on the informed opinion of several individuals is called:

3. A rhythmic annual pattern in sales or profits is called:

4. Growth trend analysis assumes:

5. Lagging economic indicators include:

6. The Delphi method:

7. A secular trend is the:

8. Linear trend analysis assumes:

9. The forecasting technique least-suited for short term projection is:

10. Which of the following forecasting methods is not qualitative?

11. Time-series methods:

14. Which of the following is a leading economic indicator?

15. Econometric methods:

16. A diffusion index that registers 40% indicates that:

17. Econometric forecasting methods:

20. Unpredictable shocks to the economic system are called:

21. A leading economic indicator of business cycle peaks is given by:

23. Economic relations that are hypothesized to be true are called:

Forecast sales for the years 2010 and 2015.

Calculate 5-year and 10-year sales forecasts.

Forecast sales for the years 2008 and 2013.

Forecast sales for the years 2008 and 2013.

M = preventive maintenance, t = time, a0 = constant term, a1 = regression slope coefficient,

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