Eco550 Week 3

Chapter 5 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 the S vary jointly with disposable personal income Y and the population between ages 15 and 40,Z, and inversely with the price of the snowmobiles P. Based on the past data, the best estimate of this relationship is S= K *YZ/P where k has been estimated (with the pst data) to equal 100.
If Y=$11,000, Z= $1,200, and P=$20,000
a) what value would you predict for S?

Answer:
The given function is S=K*YZ/P

at the given values of;
k=100
Y=$11,000
Z=$1,200
P=$20,000
the value of S is:

S=100(11000*1200)/20000= $66,000

so there would be a sales of $66,000 at above given values.

5. A firm experienced the demand shown in the following table.



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 w = 0.9 and a w = 0.3). The exponential smoothing forecasts may be begun by assuming Ŷt+1 = 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?

5- year 3-Year Exponential Exponential Actual Moving Moving Smoothing Smoothing
Year Demand Average Acverage (W= 0.9 ) (W= 0.3 )
2000 800 xxxx xxxx xxxx Xxxx
2001 925 xxxx xxxx 687.5 762.5
2002 900 xxxx Xxxx 947.5 932.5
2003 1025 xxxx 875 787.5 862.5
2004 1150 xxxx 950 912.5 987.5
2005 1160 960 1025 1141 1147
2006 1200 1032 1112 1124 1148
2007 1150 1087 1170 1245 1215
2008 1270 1137 1170 1042 1114
2009 1290 1186 1207 1252 1264
2010 * 1214 1237 Sum 9139 9433

RMSE= 9139/9 =1,015 when W=0.9
RMSE=9433/9
=1,048 When W=0.3
I would choose to use W=9 because it has the least amount of change between the two numbers. We should always use the number with least amount of deviation.

6. The economic analysis division of Mapco Enterprises has estimated the demand function for its line of weed trimmers as Qd = 18,000 + 0.4N - 350Pm + 90Ps where N = number of new homes completed in the primary market area Pm = price of the Mapco trimmer Ps = price 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)? Answer:
Qd-2006= 18,000+6000-17,500+4950=11450.
Ps=$50,Qd= 18,000+6000-17500+4500=11,000.
15,000-15000x0.30=10,500
Qd=18,000+4200-17500+4950=9,650.
350 means dQd/dPm, or if Pm increases 1 unit,Qd will decline 350 units.
90 means if Ps increases 1 unit,Qd will increase 90 unit.
Mapco and Surefire services are substitutes.

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: Yt= 8.25 + 0.125t 2.75D1t + 0.25D2t + 3.50D3t Where Yt = predicted sales ($ million) in quarter t 8.25 = quarterly sales ($ million) when t = 0 t = time period (quarter) where the fourth quarter of 2002 = 0 First quarter of 2003 = 1, second quarter of 2003 = 2D1t = 1 for first-quarter observations 0 otherwise D2t = 1 for second quarter observations 0 otherwise D3t = 1 for third-quarter observations 0 otherwise a). Forecast Savings-Mart's sales of patio and lawn furniture for each quarter of 2010.

1st quarter y= 8.25+0.125(29)-2.75 y= 11.875-2.75 y=9.125 Million

2nd quarter y=8.25+0.125(29)-+0.25 y=11.875+0.25 y=12.125 Million

3rd Quarter y=8.25+0.125(29)+3.50 y=11.875+3.50 y=15.325 Million

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? Answer:
An appreciation of the US dollar would mean less income in the form of dollars from foreign sales. There are several possible ways in which a company can hedge themselves against currency movements.

They could conduct all sales in US dollars. This would elimate the risk of currency movements by pushing the risk onto their customers. This option could have a negative impact in the form of lost sales from customers unwilling to purchase in US dollars.

They could hedge themselves with either future or forward contacts. To do this they will need to calculate how much they will lose if the dollar appreciates and get into contacts that will match those losses with equal gains in the event of dollar apprecation. The down side of this option is that these contacts will lose money if the dollar depreciates which prevents gains the company could have had in the event that happens.

They could hedge themselves with options. This would allow them to prevent losses in the case of appreciation in the same way as futures and forwards. The difference is that if the dollar depreciates, the company can still gain from the currency movement in its favor. This comes at a cost though because options have premiums which make them more expensive to get into than futures or forwards.

They could choose to do nothing. All of the above options have costs associated with them. Sometimes the best option is bare the risk of exchange rate fluctuation yourself in order to avoid these costs. 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 Ail Lines 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? Answer: In this case, the effect will be straight and clear. If Boing aircraft prices in dollars increase 20 percent and the Yen-Dollar exchange rate declines 15%, (yen gets weaker against the dollar), there will be two fold loss to the Japan Airlines for the purchase of Boeing 747. The Japan Air Lines will see the cost rising by 35%. (20% increased prices compounded by 15% decline in exchange)

If the yen then depreciated and assuming that the competitor prices are unchanged, the Boeing's margins are likely to be affected by 20% only (to the extent of price rise) as because the rest of the loss will be treasury loss for the Japan Airlines due to currency fluctuation and this does not go to the Boeing's kitty

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? Domestic consumption increases causing exports from a country’s trading partners to increase: in a domestic contraction, import consumption decreases causing exports from the trading partners to decline. These differences in cost competitiveness however do not systematically translate into differences in competitiveness price. Divergences between the tradable and non-tradable sectors caution about using of aggregate ULCs as indicators of trade competitiveness. 10. What three factors determine whether two economics with separate fiscal and monetary authorities should form a currency union? Give illustration of each factor using NAFTA economies. Answer: Monetary policy: The main objective of monetary policy is to maintain domestic financial stability and preserve the pegged exchange rate system. Monetary policy in the Gulf could be perceived as less effective than in economies with floating ER arrangements, coupled with the absence of well-developed secondary capital market. The efficacy of monetary instruments on economic activities remained limited. Oil and natural gas, as the main exports of the Gulf, continue to be the principal source of foreign exchange reserves. Broadly speaking, fiscal policy is the main determinant of monetary policy. The role of monetary policy in the Gulf is to control monetary development ensuing from external factors influencing domestic economic activities through fiscal expansions (Al Hamar, 1988).

In view of that, one would expect the newly created Gulf Central Bank and the existing
national central banks (and monetary agencies) to share the same monetary policy objective of price stability. As a result, the expectation is that GCB would be viewed as a centralized entity in charge of the union-wide monetary policy, where harmonized formation of monetary policy would take place. However, since day-to-day exchange rate policy falls into the responsibility of the GCB, conflicting situations between the domestic price stability and external stability of the single currency (exchange rate) may arise.

Fiscal policy: Government expenditure is the most potent instrument behind economic
activities in the GCC economies and is the mainstay of fiscal policy in the Gulf. Current
expenditures, mainly the government wage bill, represent large portion of the GCC members’ budgets. The average current expenditures of the GCC members are usually in the neighborhood of 71 percent of total expenditures as in 2007.
On the revenue side, with the narrow tax base, GCC members continue their continuous
reliance on oil revenues, which represents 70 percent of total revenues, on average. This
renders fiscal position of the GCC countries subject to oil market developments, despite the increasing role of investment income from wealth accumulated in the past.

Coordination of fiscal policies in the GCC would help the GCB achieve its objective of
maintaining price stability. Absence of fiscal policy coordination might produce unsound fiscal stances, which could undermine monetary policy. As far as the GMU concerned, the current fixed exchange rate arrangement needs sufficient international exchange reserves to support the single currency. In the absence of centralizing fiscal activities or at least closely harmonizing national budgets, the risk that one country’s fiscal deficit can create a balance of payments deficit for the entire union is still a possibility (Allen, 1976). There are a number of fiscal issues need to be addressed by GCC countries:

1.

With the efforts being made by some GCC countries to ameliorate their overall tax
systems, issues of tax coordination might arise.

2.

To maintain harmony over various expenditure policies especially the rising current
spending (e.g. direct and indirect subsidies) and avoid unbalanced economic growth
among GCC economies, ex ante coordination is considered necessary.

3.

To bring stability to GCC revenues and suppress GDP volatility, an issue of creating
a multilateral oil stabilization fund could be viable.