SEMESTER SPRING 2019

MANAGERIAL ECONOMICS (ECO704)

ASSIGNMENT 1

TOTAL MARKS: 10
DUE DATE:

Case 1:
XYZ Company is a coupon book publisher with markets in southeastern state. XYZ
coupon books are sold directly to the public, sold through religious and other charitable
organizations, or given away as promotional items. This year, management has decided to
increase the sales by attracting customers via increased level of advertisement. Operating
experience during the past year suggests the following demand function for XYZ company:
Qd= 6500-5500P+0.05Pop+0.9I+1.7A
Where,
Q = Quantity
P = Price (Rs.)
Pop = Population
I = Disposable income per household (Rs.)
A = Advertising expenditures (Rs.)
a) Determine the demand curve faced by XYZ in a typical market in which P = 15,
Pop=200, 00, 00, I=Rs.40, 000; and A= 15,000.
b) Suppose XYZ Company increases its annual advertising expenditures from Rs.15,
000 to Rs.20, 000; what would be the demand curve in this case?
c) Evaluate the changes in demand curve before and after increasing advertising
expenditures?
(Marking scheme: 2+2+1)

Solution:
a) Demand curve faced by XYZ:
Qd= 6500-5500P+0.05Pop+0.9I+1.7A
Qd = 6500-5500P+0.05(2000000) +0.9(40000) +1.7(15000)
Qd =6500-5500P+100000+36000+25500
Qd = 168000-5500P
b) Demand curve of XYZ with A=20,000:
Qd= 6500-5500P+0.05Pop+0.9I+1.7A
Qd = 6500-5500P+0.05(2000000) +0.9(40000) +1.7(20000)
Qd =6500-5500P+100000+36000+34000
Qd = 176500-5500P
c) Increase in advertisement expenditures from 15000 to 20000 has made the demand curve of the
XYZ Company steeper. We can see that increase in advertisement expenditures has led to
increase in the intercept of the demand curve.

Case 2:
The global computer software industry is dominated by Microsoft Corp. and a handful of
large competitors from the US. During the early 2000s, fallout from the government’s
antitrust case against Microsoft and changes tied to the Internet have caused company and
industry analysts to question the profitability and long-run advantages of the industry’s
massive long-term investment in research and development (R&D). Thus, researchers ran
the following simple regression model with sales revenue as the dependent variable and
R&D expenditures as the independent variable (t statistics in parenthesis).

Sales= 21.056+$4.062 R&D

(0.13) (9.87)
R2 = 92%, F = 19.87; Critical value of F = 16.55, d.f = 2.5
Requirement:
Interpret all the findings of the researchers in detail.
(Marking scheme: 1+1+1+1+1)

Solution:
1) As we see that constant of the regression line is insignificant so the intercept should not
be used to suggest the value of sales revenue that might occur for a firm that had zero
R&D expenditures.
2) The R&D coefficient estimate of $.4.062 is slope of the curve and implies that 1 $ rise in
R&D expenditures lead to on average $.4.062 increase in sales revenue.
 3) The R&D coefficient is statistically significant at the 1% level of significance, meaning
that it is possible to be 99% confident that R&D expenditures can significantly affect firm
sales.
4) The R2=92% indicates the share of sales variation that can be explained by the variation
in R&D expenditures.
5) F=19.87>16.55 implying that variation in R&D spending explains a significant share of
the total variation in firm sales. This suggests that R&D expenditures are a key
determinant of sales in the computer software industry, as one might expect.

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