ASSIGNMENT: MANAGERIAL ECONOMICS

Q1. Scenario: Below is a multiple regression in which the dependent variable is market value of houses and the
independent variables are the age of the house and square footage of the house. The regression was estimated
for 42 houses. (Hint: Fill missing values first).

SUMMARY OUTPUT

Regression Statistics
Multiple R 0.745495
R Square ?
Adjusted R Square ?
Standard Error 7211.848
Observations 42

ANOVA
df SS MS F
Regression 2 2537650171 ? ?
Residual 39 2028419591 ?
Total 41 4566069762

Coefficients
Standard t Stat P-value Lower 95% Upper 95%
Error
Intercept 47331.38 13884.34664 3.408974 0.001528 19247.6673 75415.0958
House Age -825.161 607.3128421 ? 0.182046 -2053.5662 403.243744
Square Feet 40.91107 6.696523994 ? 3.65E-07 27.3660835 54.4560534

i) What is the estimated regression equation for determining the market value of houses?
ii) If the age of a house is 25 years with 1,500 square feet, what is the estimated market value of the house?
iii) What percentage of the variation in the dependent variable, Market Value, is explained by the regression
model?
iv) If the age of a house increases by 1 year given that the square feet is held constant, what is the impact on
the house's market value?
v) By examining the t-statistics associated with the regression coefficients, at the 5 percent significance level,
which of the two independent variables are statistically different from zero?
vi) Based on the 95 percent confidence intervals for each of the partial regression coefficients, which
independent variable is statistically different from zero and why?

Q2. Use the following information on a hypothetical short-run production function to answer questions a-c.

Units of Labor/Day 5 6 7 8 9
Units of Output/Day 120 140 155 165 168

The price of labor is $20 per day. Ten units of capital are used each day, regardless of output level. The price of
capital is $50 per unit.

a. Calculate the marginal and average variable product of each unit of labor input.
b. Calculate total, average total, average variable, and marginal costs.
c. Can you tell where diminishing marginal returns sets in?
Q3. Complete the table below, which represents the production costs for a typical firm. (Round numbers to the
nearest tenth.)

TP TFC TVC TC AFC AVC ATC MC

0 $20 $0 $__ --- --- --- ---
1 ___ 27.5 ___ $__ $__ $__ $27.5
2 ___ 46.8 ___ ___ 23.4 ___ ___
3 ___ 63.3 ___ ___ ___ ___ ___
4 ___ 82.5 ___ 5.0 ___ ___ ___
5 ___ 106.7 126.7 ___ ___ ___ ___
6 ___ 139.7 ___ ___ ___ ___ ___
7 ___ 181 ___ ___ ___ 28.7 ___

At what level of output do diminishing returns set in? How do you know?

Q4. Use the following pair of graphs, which illustrate the market for corn (which is used to produce corn-based
ethanol) and a representative firm, to answer the following questions.

a. Assume policymakers pass a law requiring that all gas sold in the United States contain at least 10 percent
corn-based ethanol. In the graphs above, illustrate the short-run effects of this law. In particular, show how the
law would affect
i. the short-run equilibrium in the market for corn,
ii. the short-run demand curve faced by the representative firm, and
iii. the representative firm's short-run profit-maximizing level of output.
iv. Label the new curves and equilibrium values using a subscript 2.

b. Next, graphically illustrate how, after the initial changes you illustrated in question 7, the corn market and the
representative firm would adjust back to long-run equilibrium. Label any new curves and equilibrium values
using a subscript 3. After all adjustments have taken place, what has happened to the equilibrium market price,
the number of firms operating in the market, and the representative firm's profits? Why?
Q5. Use Figure 8.2, which represents the situation faced by a monopolist, to answer questions a-c.

a. In Figure 8.2, indicate the profit maximizing price and output level and label them P1 and Q1.
b. Shade in the area that represents the firm's economic profit (or loss).
c. If this firm wished to discourage entry by other firms it could produce the output level at which it earns only a
zero economic profit. Indicate the price and output level associated with a zero economic profit and label them
P2 and Q2.

Q6. The following are the actual sales for the last six periods:

Period Sales
1 750
2 820
3 600
4 850
5 900
6 700

a) Using a 3-month moving average, what would be your prediction for period 7?
b) If the exponential smoothing forecasting method is used, and the smoothing factor is .6, what will be the
forecast for period 7?
c) Compare the quality of the two models by calculating the root-mean-square error for the data set.

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