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U of M APEC 3002 - ME Midterm Exam 1 Fall 2019

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Midterm Examination I Applied Economics 3002 Applied Microeconomics: Managerial Economics October 10, 2019 Name: __________________________________________________________1 Name: ________________________________________ Score: ________ / 111 Points A. Multiple Choice. Choose the best answer from the alternatives by circling the letter (a, b, c, ...) of your choice. [24 Points] A.1 Whether or not all of the independent variables in a regression equation together explain a statistically significant proportion of the variation in the dependent variable is indicated by the: a. estimated intercept d. number of observations b. log of the dependent variable e. none of the above c. F statistic A.2 Forecasting techniques which employ leading, lagging and coincident economic indicators to predict changes in direction of business and economic variables are known as: a. barometric techniques d. exponential smoothing b. econometric methods e. none of the above c. surveys and opinion polling A.3 For a constrained optimization problem, the value of the Lagrange multiplier for a constraint indicates: a. if the second order conditions hold. b. the maximum or minimum value of the objective function. c. the rate at which the objective value will change as a result of a change in the level of the constraint. d. the difference between the value of the constraint function and the lower of upper limit on that value. A.4 When using a multiplicative exponential function Y = aX1b1X2b2X3b3 to represent an economic relation-ship (where Y is the dependent variable and X1, X2 and X3 are the independent variables), with linear re-gression analysis, estimates of the parameters (a, b1, b2 and b3) can be obtained by first: a. taking the logs of a, b1, b2 and b3. b. taking the logs of Y, X1, X2 and X3. c. squaring each dependent and independent variable. d. none of the above A.5 To evaluate the quality of business forecasts, actual and forecast values may be used to compute the average error and root mean squared error: a. to determine seasonality. b. to test the significance of a particular independent variable. c. to measure bias and goodness of fit, respectively. d. all of the above. e. none of the above. A.6 If the cross-price elasticity of demand is positive between two goods, the goods are said to be: a. complements. d. price inelastic. b. substitutes. e. normal. c. price elastic.2 A.7 The price elasticity of demand for a good is estimated to be -2.2. If the price of the good decreases by 1 percent, what will be the expected percentage change in the quantity sold? a. Increase by 22% d. 0% b. Decrease by 2.2% e. Increase by 2.2% c. Decrease by 10% A.8 An increase in the quantity demanded of a normal good could be caused by: a. an increase in the price of a substitute good b. an increase in the price of a complementary good c. an increase in consumer income levels d. both a and c are true e. none of the above B. Estimating Demand and Elasticity. Consider a market demand function Q = 120 – 1.25P + 0.50Y where Q is the quantity demanded, P is the unit price, and Y is income. Suppose the price is 24.0 and income is 60.0. [12 Points] B.1 Calculate the estimated quantity demanded. Show your work. B.2 Calculate either the price elasticity or income elasticity of demand (specify). Show your work and briefly interpret your result.3 C. A Profit Maximization Problem. [21 Points] The following exercises are based on a problem in Chapter 2 of Samuelson and Marks. Suppose a firm faces the following product demand function: Y = 8,500 - 50P Where Y is the quantity demanded and P is the price of the good. C.1 Using the demand function above, derive the firm’s inverse demand or average revenue equation, AR(Y). C.2 The demand function above implies a total revenue equation of TR(Y) = 170Y – 0.02Y2. If the firm’s cost function is C(Y) = 100,000 + 38Y, the profit function is: π(Y) = TR(Y) – C(Y) = 170Y – 0.02Y2 – 100,000 – 38Y = - 100,000 + 132Y -0.02Y2 Find the profit maximizing level of output, Y*. Address both first order conditions and second order condi-tions. What is the maximum profit? Write a summary of your analysis and results.4 D. A Consumption Problem. [22 Points]. The chart below represents a graphical model of a two-good consumer problem. It shows the budget constraint, the indifference curve for the maximum level of utility (U*), and the utility maximizing consumption bundle (A), given prices, income Y’ and the consumer’s utility function. D.1 Income is Y = $1200. What is the price of good one? ________ Good two? ________ D.2 Manipulate the chart above to show the effect on consumption of an increase in income from $1200 to $1500, including the resulting utility maximizing consumption bundle. Label the new elements of the chart clearly. Based on your graphical results, the utility maximizing consumption of good one is approxi-mately ________, and the utility maximizing consumption of good two is approximately ________. D.3 Based on your results, is either good an inferior good? Explain. Y=1200U*A0501001502002503003504000 50 100 150 200 250 300 350 400X2X15 E. Regression Analysis of Demand. [32 Points] On lab assignments, you used the regression analysis routine in Excel to study demand data for Electronic Data Processing, Inc. Data for the problem are in the table below. EDP Inc has twelve observations of monthly data on contract sales (demand, Q), price (P), advertising expenditures (AD) and personal selling expenditures (PSE). You used these data to estimate the following demand model: Q = γ0 + γ1P + γ2AD + γ3PSE + ϵ Month Units Sold Q Price P, $ Advertising Expenditures AD, $ Personal Selling Expenditures PSE, $ January 2,500 3,800 26,800 43,000 February 2,250 3,700 23,500 39,000 March 1,750 3,600 17,400 35,000 April 1,500 3,500 15,300 34,000 May 1,000 3,200 10,400 26,000 June 2,500 3,200 18,400 41,000 July 2,750 3,200 28,200 40,000 August 1,750 3,000 17,400 33,000 September 1,250 2,900 12,300 26,000 October 3,000 2,700 29,800 45,000 November 2,000 2,700 20,300 32,000 December

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