Morehead State University ECON 661 Test 1 - Part II SP 2015

Test Test 1-Part II

• Question 1

7 out of 7 points

An auto mechanic earning $70,000 per year working for a local car dealership decided to open his own car repair shop. He took $100,000 out of one of his investment accounts that had been earning 6% a year and used that money to start up the business. He worked hard the first year, hiring one employee for an annual salary of $40,000. By the end of the year, the shop generated total revenue in the amount of $1,000,000. Total material and utilities cost for the year was $500,000.

What was the yearly economic profit for the business? Show all your calculations.

• Question 2

5 out of 5 points

Suppose you are considering moving your company’s headquarter from Louisville (KY) to Phoenix (AZ). Last year you paid $100,000 for an option to buy a building in (Atlanta) Phoenix. The option gives you the right to buy the building at a cost of $1,000,000, so that if you ultimately make the purchase your total expenditure will be $1,100,000. Now you find that a comparable building has become available in the same city (Phoenix) at a price of $1,050,000. Which building should you buy? Justify your answer.

• Question 3

6 out of 6 points

Assume a declining profits for internet service force several firms in the area to drop out of the market. Describe the effect of the reduction in the number of service providers and the subsiquent adjustment of the market to the new equilibrium price and quantity by filling the blank spaces.

As the result of the event, [a](demand, supply) would [b](increase, decrease) creating excess quantity of [c] (demand, supply) at the initial equilibrium. Price would then[d](rise, fall) causing quantity [e](demanded, supplied) to [f](decrease, increase) until new equilibrium is reached.

• Question 4

6 out of 12 points

You are hired by a real estate company to conduct research on the real estate market in your city. Part of the research includes identifying the variables that determine the value of houses. To this end, you conducted a multiple regression analysis 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. You estimated the regression equation using cross-section data of 42 houses. Below is the computer printout of the regression results.

SUMMARY OUTPUT

Regression Statistics

Multiple R 0.745495

R Square 0.555762

Adjusted R Square 0.532981

Standard Error 7211.848

Observations 42

ANOVA

df SS MS F Significance F

Regression 2 2537650171 1.27E+09 24.39544 1.34E-07

Residual 39 2028419591 52010759

Total 41 4566069762

Coefficients Standard error t- Stat P-value Lower 95% Upper 95%

Intercept 47331.38 13884.34664 3.408974 0.001528 19247.6673 75415.096

House Age -825.161 275.3128421 -2.997312 0.002046 -2053.5662 403.24374

Square Feet 40.91107 6.696523994 6.109299 3.65E-07 27.3660835 54.456053

Provide a report of your research by answering the following questions.

a. What is the estimated regression equation for determining the market value of houses?

b. If the age of a house is 25 years with 1,500 square feet, what is the estimated market value of the house?

c. What percentage of the variation in the dependent variable, Market Value, is explained by the regression model?

d. 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?