Sheu Mojeed
Module 3 – QCT 3
BUSI620
Liberty University
Salvatore Chapter 6:
Discussion Questions: 2
(a) What are qualitative forecasts? What are the most important forms of qualitative
forecasting? Qualitative forecasts estimate variables at some future data using the results
for decision making including for surveys and opinion polls of business and consumer
spending intentions. The following can be described as the most important forms of
qualitative forecasting; Time-series analysis, Executive opinions, Sales force polling, and
Consumer surveys.
(b) What is their rationale and usefulness? The rationale and usefulness is that many
economic decisions and made well in advance of actual expenditure. For example
businesses usually plan to add to plant and equipment long before expenditures are
actually incurred. Also surveys and opinion pools are often used to make short-term
forecasts when quantitative data are not available. Polls can also be very useful in
supplementing quantitative forecast. Anticipation changes in consumer testes or business
expectation about future economic condition and forecasting the demand for a new
product (Salvatore, 2014).
Discussion Question: 3
I. What are time-series data? What are the possible sources of variation in time series data?
Time series data is a set of data on a sample that is measured over time. The sample
should remain close to the same with the exception of voluntary removal/subjects dying
or going out of contact. It is similar to an interrupted time series design where multiple
groups are studied (usually different age groups) to create a data set that reflects a large
range of variables (like age) without having to wait for maturation. Sources of variation:
Maturation, people quitting/dying, selection biases, and a few more.
II. Why does time-series analysis deal primary with trend and seasonal variations
rather than cyclical and irregular or random variations.
Cyclical variations are difficult to test using this research design because it is
very, very difficult to figure out where in the cycle you are. It could be that during the
cycle, your variables will be the same at two or even more points in your timeline.
Random variations (usually caused by outside influence, selection bias, or people
quitting) are always problematic and cause problems with extrapolation
Discussion Question: 15
Explain why it is still useful to pursue forecasting even though it is often off the
mark by wide margins?
Forecasting helps to identify foreseen future inactivity’s that could potentially
affect the performance of the company using the forecasting; forecasting allows for those
forming the company to know of the possible future demand of what it is they are
providing. Forecasting, also known as the method of estimation in unknown business
situations, helps with obtaining the best knowledge of what might occur in the market.
Forecasting is important to manufacturing companies, because it helps predict the
consumer demand for a particular product might be. The forecast needs to be as correct
as possible to help avoid more expenses because of the stock level on hand. Also, when
forming a company, forecasting is important because it can help predict the possible
future demand. Forecasting is not without its faults. Included within the faults of
forecasting can be dramatic economical changes that cannot be predicted. These changes
can be positive or negative. Forecasting material, labor, and other resources is essential
for good forecasting. By forecasting these well, suitable action can be taken to ensure the
proper inventory is on hand. Also, it can help plan a balanced work-load. Good labor
relations may be maintained, as there would be lesser hiring and firing activities by the
management with better manpower planning.
Forecasting is useful because of:
1. Effective handling of uncertainty
2. Better labor relations
3. Balanced work-load
4. Minimization in the fluctuations of production
5. Better use of production facilities
6. Better material management
7. Better customer service
8. Better utilization of capital and resources
9. Better design of facilities and production system. Efforts in forecasting activity involve
two types of costs. While more effort in forecasting causes increased cost due to data
collection and analysis; lesser forecasting activity involves lost revenue, which may be
due to unplanned labor, unplanned material or unplanned capital cost. A balance of
forecasting effort and a zone near to accuracy cost trade off is essential.
b. Problems: 7 and appendix problems 1 and 3 (pp. 260–261).
Month Leading Indicator A Leading Indicator B Leading Indicator C
2 110 230 27
3 120 240 33
Month Leading Indicator A Leading Indicator B Leading Indicator C
3 +10 +10 +6
From 2-3 ↑ ↑ ↑
Month Diffusion Index
2 -
3 100%
1. Appendix problem 1: Delete “Eliminating the data for 2000.” You need to calculate the
moving average forecasts and RMSEs for year 2000, not the whole data period.
According to RMSE, moving average method is better than the exponential smoothing
method because of the low RMSE. The lower the RMSE, the better is the performance
and hence the forecast values. (SEE ATTACHED EXCEL SHEET)
3-month moving average gives the better forecast for 2000 than the 6-month moving
average method because of low MSE. The higher the MSE, the worst is the performance.
(SEE ATTACHED EXCEL SHEET)
Salvatore Chapter 7:
3: (a) how is the law of diminishing returns reflected in the shape of the total product
curve? (b) What is the relationship between diminishing returns and the stages of
production?
Law of diminishing returns: as more and more of a variable factor is added to a fixed
factor, output will rise initially but will eventually fall. Initially, in region [0 – A], there are
increasing returns. In the zone [A – B] there are decreasing returns, and beyond B there are
negative returns. This theory supports the shape of the marginal and average cost curves. Both of
these curves will be u-shaped as eventually diminishing returns will lead to costs increasing.
Initially increasing returns mean that both AC and MC will fall, but once diminishing returns set
in both curves start to rise again. The marginal cost curve will intersect the average cost curve at
its minimum point. The actual position of the AC curve will vary with a number of factors. Costs
of factor inputs (labor, materials, services etc) the cheaper the inputs the lower the average cost
will be at any given output.
Productivity – productivity can be defined as output per unit input. The more productive the
firm, the more output it gets from its inputs and the lower the average cost at any output.
Productivity is measured in a number of ways:
Marginal product (MP) – the change in total output resulting from the adding of one extra unit
of a variable factor, often labor.
Average product (AP) - total output / units of variable factor being used. The choice of factor
inputs will be driven by their costs, productivity and effect on product cost. An efficient firm will
make its choices so as to minimize its average cost at the production rate being worked
11: Minimum wage legislation requires most firms to pay workers no less than the
legislated minimum wage per hour. Using marginal productivity theory, explain how a
change in the minimum wage affects the employment of unskilled labor.
Marginal productivity theory provides for a worker to be paid according to the marginal
product, or the real wage paid to the worker would be equal to marginal product of that
particular worker. However, if there is an increase in the minimum wage, then in order to
marginal productivity theory to work, the marginal product of the labor needs to increase.
Using the law of diminishing returns (marginal product declines as more labors are
hired), the marginal product of labor should only increase with less workers or labor is
hired. So, an increase in minimum wage would mean a decrease in employment of
unskilled workers or labor. By using the labor demand and labor supply concept, the
above concept can be further explained. Take for instance, the minimum wage was set
about the equilibrium wage. When the minimum wage increase, the quantity of labor
would exceed the amount of demanded labor (this is represented by the marginal product
curve). This implies the increase (or decline) in employment status (employed or
unemployed).
13. Does the production function of table 7-1 show constant, increasing, or decreasing
returns to scale in the firm increase the quantity of labor and capital used.
(a) Doubling the quantity of labor and capital used from 2L and 2K to 4L and 4K
leads to a doubling of output also-from 18Q to 40Q. Thus, we also have constant
returns to scale in this range of the production function.
(b) The quantity of labor and capital used from 2L and 4K to 3L and 6k leads to a
increase of output also-from 28Q to 31Q. Thus, we also have constant returns to
scale in this range of the production function.
Salvatore Chapter 7:
a. Problems: 4, 10, and 13.
4: Ms. Smith, the owner and manager of the Clear Duplicating Service located near
a major university, is contemplating keeping her shop open after 4 P.M. and until
midnight. In order to do so, she would have to hire additional workers. She
estimates that the additional workers would generate the following total output
(where each unit of output refers to 100 pages duplicated). If the price of each unit
of output is $10 and each worker hired must be paid $40 per day, how many
workers should Ms. Smith hire?
MRP=MR x MP = P x MP = $10 x MP (Use information in the problem to calculate MP)
MRC=wages=$40.
Workers hired
Total
Product MP *
Marginal
Revenue Per
Product (MR)
MRP
(MP X MR)
0 0 0 10 0
1 12 12 10 120
2 22 10 10 100
3 30 8 10 80
4 36 6 10 60
5 40 4 10 40
6 42 2 10 20
*MP (Marginal Product) is the input contribution of the additional worker to the total
productivity. For example 1 worker can generate 12 units of product and 2 workers can
generate 22 units of product. So the 2nd worker contributes an additional of (22-12) 11
units of product to the total output.
When the 5th worker is hired, MRP=MRC=$40
When the 6th worker is hired, income generated by the additional worker ($20) is lower
than the MRC, in this case, the wage ($40) to be paid to the worker; hence the number of
workers to be hired to ensure maximum profit is 5 WORKERS
10. John Wilson, the owner of a fast-food restaurant, estimated that he can sell 1,000
additional hamburgers per day by renting more automated equipment at a cost of
$100 per day. Alternatively, he estimated that he could sell an extra 1,200 ham-
burgers per day by keeping the restaurant open for two more hours per day at a cost
of $50 per hour. Which of these two alternative ways of increasing output should Mr.
Wilson use?
Both alternatives cost $100, but the extra two hour alternative allows him to sell more
hamburger than the automated equipment alternative does. So he should pick being open
two more hours because he will make more money.
13: Indicate whether each of the following statements is true or false and give the
reason (a) A firm should stop expanding output after reaching diminishing returns
and (b) If large and small firms operate in the same industry, we must have constant
returns to scale.
True: because the law of diminishing returns states that once the curve begins to reflect
the law of diminish returns, a firm will invariably get diminishing returns from the
variable input. This is due to a firm using more units of the variable input with the same
amount of the fixed input; therefore each additional unit of variable input has less of the
fixed input to work and results in a decline of the marginal product. Using Figure 7-4,
point J is the climax of the curve in the top panel and is exhibiting an increase in a
decreasing rate. Thereafter, the following points decline as well.
False: constant returns are a feature of the production function and are not linked to the
size of the firm. If all firms use a production function with CRS then they all will have
CRS, and the firm size has no role in this.
References
Froeb, L. M. (2014). Managerial economics: a problem solving approach (3rd ed.). Australia:
South-Western Cengage Learning.
Salvatore, D. (2012). Managerial economics in a global economy (7th ed.). Oxford: Oxford
University Press.
