BUSS 230 Midterm, Spring 2004

OF BetkKUL _ BUSS 230 - Mid-Term Exam : March 25, 2004 1. Multiple Choice lil. True or False t Business profit is equal to total revenue minus EXPLICIT costs. 2 The monopoly theory of profit argues that because of restricted entry into an industry, firms can continue to earn profits even in the long-run. 3 Total cost is equal to average cost multiplied by output. a Profit is at a maximum when Marginal Revenue equals Marginal Cost. . Market demand |s obtained as the HORIZONTAL summation of individual demand curves. % change of QUANTITY DEMANDED divided by % change in the PRICE of other good. 7 The more independent variables, the lower the degree of freedom for a given sample. . D-W statistic tests for the presence of autocorrelation in the error terms in predicting the dependent variable (Y). 5 The trend of time-series data over several years is referred to as the secular trend. The use of Leading Indicators is an example of BAROMETRIC forecasting methods. Optimum combination occurs where fh two partial derivatives are set at zero.N . Taking partial derivatives: d (P)/d (X)=144-6X-Y = 0 d(Pyd(Y)= 116 - 4Y -X= 0 + Solving the two equations simultaneously results in X = 20 and Y = 24. i. B At the optimum output combination: Profits = 144x(20) - 3x(20)*2 - (20)x(24) - 2x(24)*2 + 116x(24) -35 = Cc Solving by adding the LAGRANGIAN function: L(X + Y - 36) d (Pd (X) = 144 - 6X - Y + L=0 d (Pid (Y) = 116 - 4Y - X+L=0 d (P')id ({L) = X + Y - 36 = Qessseses==> Getting rid of the (L) term first : = Eliminating (Y) in the above two equations results i Substituting in the constraint NLA The signs of all the coefficients are consistent with theoretical expectations: Partial d(Q)/dP < 0====> = Inverse relation between Q and P, as expected. Partial d(Q)/dl > O====> Consistent with coffee being a normal good. Partial d(Q)/dPr > 0====> Consistent with related good being a coffee substitute. Partial d(Q)/dT < 0====> Consistent with downward trend in coffee consumption. 1V.B At 5% significance level and with 27 Degrees of Freedom, Critical t is 2.052. Coefficients of P, |, and T exceed critical t, implying they are significantly different from zero. Coefficient for Pr is not significantly different from zero. IV. Cc R-square of 0.80 indicates that regression explains 80% of the proportion of the sum squared deviations of the Y-values from the mean Y-value. As such, the regression is a reasonably good fit of the underlying data. Since R-square = 0.80, SSR = 4 SSE, and since Calculated F-stat = SSR/(k-1)/SSE/(n-k), Calculated F-stat = 4SSE/(k-1)/SSE/(n-k) With k = 5, and n-k = 27, Calculated F-stat = 27 which exceeds Critical F of 2.73. Therefore the independent variables taken together explain the behavior of Y. Iv. D Critical D-W values for 4 independent variables and 32 observations are: di = 1.08 and du= 1.63 Since Calculated D-W of 1.85 > du, we reject the presence of autocorrelation. V.E Forecast for Q in second quarter of 2003 is: Q = 2.50 - 0.25X2.00 + 0.50x20.00 + 0.4x1.00 - 0.10x34 = V.A _ Arccross elast = ((6500-8000)/0.5*(6500+8000))/((30-35)/0.5"(35+30)) = V.B Arc price elasticity = - 1.5 = ((8000-6500)/0.5*(8000+6500))/((P-25)/0.5"(P+25)) - 1.5 = ((1500/7250)/((P- 675=31P, P \ ee V.C TR before cut = 8000*25 = | 200,000 ~ TR after competitor's cut and reaction to that = 8000*21.774 = [174,194]