ECO 550 Week 3 Chapter 5 (1,5,6,9) & Chapter 6 (2,7,9,10)
ECO 550 Week 3 Chapter 5 (1,5,6,9) & Chapter 6 (2,7,9,10)
Chapter 5
1. The forecasting staff for the Prizer Corporation has developed a model to predict sales of its aircushionedride 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 $50, what effect will this have on Mapco's sales?
c. What effect would a 30 percent reduction in the number of new homes completed have on Mapco's sales ( ignore the impact of the price cut of the Surefire trimmer)?
9. SavingsMart (a chain of discount department stores) sells patio and lawn furniture. Sales are seasonal, with higher sales during the spring and summer quarters and lower sales during the fall and winter quarters. The company developed the following quarterly sales forecasting model:
+ 0.125t 2.75D1t + 2.25D2t + 3.50D3t
Where sales ($ million) in quarter t
sales ($ million) when
period (quarter) where the fourth quarter of First quarter of , second quarter of ,. . .
for firstquarter observations 0 otherwise
for second quarter observations 0 otherwise
for thirdquarter observations 0 otherwise
Forecast SavingsMart s sales of patio and lawn furniture for each quarter of 2010.
Chapter 6
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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Solution: ECO 550 Week 3 Chapter 5 & Chapter 6