ECN-601 Module 3 CLC: Estimation of Demand, Production, and Cost Function

Economics – Cost and Profit Maximization Continued

Grand Canyon University  

Text book: Economics for Managers (3rd Edition)

Estimation of Demand, Production, and Cost Functions

This is a CLC assignment.

Learners are required to present insight on developing estimates for the demand function, production function, and cost function for a medium-sized manufacturer.  Use regression analysis on Excel to complete this assignment.

The spreadsheet must be organized as follows:

·         Tab 1: Student names

·         Tab 2: Original data

·         Tab 3: Output and answers to questions for demand function (Copy the data necessary to the top of this spreadsheet before running the regression.)

·         Tab 4: Output and answers to questions for production function (Copy the data necessary to the top of this spreadsheet before running the regression.)

·         Tab 5: Output and answers to questions for cost function (Copy the data necessary to the top of this spreadsheet before running the regression.)

Complete the following questions on demand function:

1. Write the demand equation resulting from your output. Include specific coefficients.

2. Calculate the price elasticity of demand for this manufacturer if the price is $9.25 per unit, consumer income is $21,000, advertising is $100,000, and the quantity demanded is $499,999. Is demand elastic or inelastic at this price and quantity?

3. Calculate income elasticity of demand for this manufacturer at the same point as identified in question 2. Is the product an inferior good, a normal good, or a luxury?

Complete the following questions on production function:

1. Write the production function resulting from your regression output. Include specific coefficients.

2. Assume a firm has five plants and 60,000 hours of labor. Estimate the firm’s:

a. Marginal product (add one hour of labor and measure the change in output)

b. Average product of labor

3. Now assume the firm has six plants and 60,000 hours of labor. Estimate the firm’s:

a. Marginal product of labor

b. Average product of labor

4. How do your answers to questions 2 and 3 compare to one another? Is this what you would expect?

Complete the following questions on cost function:

1.      Write the cost function resulting from your regression results. Include specific coefficients.

2.      Estimate the total, average, and marginal costs for a firm with a quantity sold of 60,000 units.

3.      Is a firm operating at the point identified in question 2 operating at a profit-maximizing level of output? How do you know? If they are not, should they expand or reduce quantity sold to move closer to the profit maximization level? Explain your reasoning.

4.      Estimate the average cost for a firm with a quantity sold of 70,000 units. Compare your answer with the answer to question #2 above. Does the manufacturer appear to have economies of scale? How do you know?