ECO 550 Chapter 5 and 6
Problems Week 3
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ECO 550 Check Your
Understanding Homework Problem Week 3
ECO 550 Chapter 5
Problems 1,5,6,9
1. The forecasting
staff for the Prizer Corporation has developed a model to predict sales of its
air-cushioned-ride snowmobiles. The model specifies that sales S vary jointly
with disposable personal income Y and the population between ages 15 and 40, Z,
and inversely with the price of the snowmoblies P. Based on past data, the best
estimate of this relationship is *YZ/P where k has been estimated (with past
data) to equal 100.
a. If Y = $11,000, Z =
$1,200, and P = $20,000, what value would you predict for S ?
b. What happens if P is
reduced to $17,500?
c. How would you go about
developing a value for k?
d. What are the potential
weaknesses of his model?
5. A firm
experienced the demand shown in the following table.
year —— actual demand—- 5
yr moving avg — 3 yr moving avg– exponential smoothing — exponential smoothing
( ) — ( )
_________________________________________________________________________________________________
2000 | 800 | xxxx | xxxx | xxxx | xxxxx 2001 | 925 | xxxx | xxxx | _____ |
__________ 2002 | 900 | xxxx | xxxx | ______ | __________ 2003 | 1025 | xxxx |
_____ | ________ | ___________ 2004 | 1150 | xxxx | ______ | _________ |
____________ 2005 | 1160 | _____ | _______ | __________ | _____________ 2006 |
1200 | _______ | _______ | __________ | ____________ 2007 | 1150 | _______ |
________ | ___________ | ____________ 2008 | 1270 | ________ | ________ |
___________ | ____________ 2009 | 1290 | _________ | ________ | ____________ |
___________ 2010 | * | _________ | _________ | ____________ | ____________
Unknown future value to be forecast.
a. Fill in the table by
preparing forecasts based on a five- year moving average, a three- year moving
average, and exponential smoothing( with a and a ). Note: The exponential
smoothing forecasts may be begun by assuming Yt+
b. Using the forecasts
from 2005 through 2009, compare the accuracy of each of the forecasting methods
based on the RMSE criterion.
c. Which forecast would
you have used for 2010? Why?
6. The economic
analysis division of Mapco Enterprises has estimated the demand function for
its line of weed trimmers as ,000 + 0.4N – 350Pm + 90Ps where of new homes
completed in the primary market area of the Mapco trimmer of its competitor’s
Surefire trimmer In 2010, 15,000 new homes are expected to be completed in the
primary market area. Mapco plans to charge $50 for its trimmer. The Surefire
trimmer is expected to sell for $55.
a. What sales are
forecast for 2010 under these conditions?
b. If its competitor cuts
the price of the Surefire trimmer to $50, what effect will this have on Mapco’s
sales?
c. What effect would a 30
percent reduction in the number of new homes completed have on Mapco’s sales (
ignore the impact of the price cut of the Surefire trimmer)?
9. Savings-Mart (a chain
of discount department stores) sells patio and lawn furniture. Sales are
seasonal, with higher sales during the spring and summer quarters and lower
sales during the fall and winter quarters. The company developed the following
quarterly sales forecasting model:
+ 0.125t 2.75D1t +
2.25D2t + 3.50D3t
Where sales ($ million)
in quarter t
sales ($ million)
when
period (quarter) where
the fourth quarter of First quarter of , second quarter of ,. . .
for first-quarter
observations 0 otherwise
for second quarter
observations 0 otherwise
for third-quarter
observations 0 otherwise
Forecast Savings-Mart s
sales of patio and lawn furniture for each quarter of 2010.
ECO 550 Chapter 6
Problems 2,7, 9, 10
2. If the U.S. dollar were
to appreciate substantially, what steps could a domestic manufacturer such as
Cummins Engine Co. of Columbus, Indiana take in advance to reduce the effect of
the exchange rate fluctuation on company profitability?
7. If Boeing
aircraft prices in dollars increase 20 percent and the yen/dollar exchange rate
declines 15 percent, what effective price increase is facing Japan Airlines for
the purchase of a Boeing 747? Would Boeing’s margin likely rise or fall if the
yen then depreciated and competitor prices were unchanged? Why?
9. If unit labor
costs in Spain and Portugal rise, but unit labor costs in Germany decline and
other producer prices remain unchanged, what effect should these factors by
themselves have on export trade and why?
10. What three
factors determine whether two economies with separate fiscal and monetary
authorities should form a currency union? Give an illustration of each factor
using NAFTA economies.
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