Running Head: Questions for Critical Thinking 3
Questions for Critical Thinking 3
BUSI 620
Liberty University
July 24, 2016
1
Running Head: Questions for Critical Thinking 3
a. Discussion Questions: 2(a) and (b), 3(a) and (d), and 15.
b. Problems: 7 and appendix problems 1 and 3 (pp. 260–261).
2
Time series analysis attempts to forecast future values of the time serioes by examining past
observations of the data only. The assumption is that time series will continue to move as in
the past and the pattern will continue. For this reason time series analysis deals primarily
with trend and seasonal variations which would cause the most fluctuation.
Qualitative forecasts are used to supplement quantitative forecasts or used when
quantitative date are not available, examples of this are surveys and opinion polls.
These are used when a firm is introducing new products to the market.
Time-series data is the values of a variable arranged chronologically by days, weeks, months,
quarters or years. The possible sources of variations are secular trend, cyclical fluctuations,
seasonal variations and irregular influences
The rationale for quantitative forecasts is that many economic decisions are made in
advance of the actual expenditures. Therefore it is used to predict future purchases,
inventory changes and major consumer expenditures.
3 QUESTIONS FOR CRITICAL THINKING
Salvatore Chapter 6:
2 (b) What is their rationale and usefulness?
2 (a) What are qualitative forecasts? What are the most important forms of qualitative
forecasts?
3(a) What are time-series data? What are the possible sources of variation in time-series
data?
3(d) Why does time-series analysis deal primarily with trend and season variations rather
than with cyclical and irregular or random variations?
month 2 = (230 – 200) / 200 = 15%,
month 3 = (240 – 200) / 200 = 20%.
month 2 = (110-100) / 100 = 10 %,
month 3 = (120 – 100) / 100 = 20 %.
Running Head: Questions for Critical Thinking 3
month 2 = (27 – 30) / 30 = -10 %,
month 3 = (33-30) / 30 = 10%.
3
Economic forecasting is used to reduce the risk or uncertainty that a firm faces for short term
decisions and for long-term growth. The benefits of forecasting with errors are better than the
risk of predicting blindly.
Month Leading Leading Leading
indicator indicator indicator
A B C
1 100 200 30
2 110 230 27
3 120 240 33
Values 1 1 1
Note:
1. P7: The composite index is obtained by calculating the percentage change for each series
relative to the base month and then averaging these percentage changes. The percentage
change from the first to the second month is 10 for indicator A, 15 for indicator B, and
−10 for indicator C. Their simple average (since each indicator is given equal weight) is 5
percent. Taking the first month as the base period with a composite index of 100, we
obtain the composite index of 105 for the second month. The diffusion index from month
1 to 2 is 66.7 (=2/3) because two indicators move up and move down (see p. 239).
For indicator B percentage change in
For indicator A percentage change in
For indicator C percentage change in
15. Explain why it is still useful to pursue forecasting even though it is often off the
mark by wide margins.
7. The following table presents data on three leading indicators for a three- month period.
Construct the composite index (with each indicator assigned equal weight) and the
diffusion index.
Running Head: Questions for Critical Thinking 3 2
The 3 month moving average gives a better forecast than the 6mth moving average method.
Higher MAD=low performance
Average for month 2 for all indicators = (10+15-10) / 3 = 5%.
The composite index for the base period (1stPP month) is 100, so adding the 5% average from second
month will lead to 105% of composite index.
Average of month 3 for all indicator = (20 + 20 +10) / 3 = 16.67%. So adding 16.67% to 100 gives
116.67% composite index for month 3.
Diffusion index is the percentage of leading indicators that are increasing considering all the leading
indicators that are changing in the firm. Diffusion index for month 2 is 2/3 of 100 because in month 2,
two of the three indicators have increased and one has decreased, so the diffusion index is 66.67, and in
case of month 3 all three indicators have increased so the diffusion index will 100 again.
1. The following table reports the Consumer Price Index for the Los Angeles area on a
monthly basis from January 1998 to December 2000 ( base year = 1982– 1984). Use Excel
to forecast the index for all of 2000 using a three- and six- month average. Which provides a
better forecast for 2000 using the data provided?
Time
Jan-00
Feb-00
Mar-00
Apr-00
May-
00
Jun-00
Jul-00
Aug-00
Sep-00
Oct-00
Nov-00
Dec-00
CPI
167.9
169.3
170.7
170.6
171.1
171
171.7
172.2
173.3
173.8
173.5
173.5
3-month
MAF
167.2
167.4
168.2
169.3
170.2
170.8
170.9
171.3
171.6
172.4
173.1
173.5
A-F
0.7
1.87
2.53
1.3
0.9
0.2
0.8
0.93
1.67
1.4
0.4
-0.03
MSE
RMSE
(A-F)^2
0.49
3.48
6.42
1.69
0.81
0.04
0.64
0.87
2.78
1.96
0.16
0
1.61
1.27
6-month
MAF
166.82
167.17
167.67
168.25
168.82
169.48
170.1
170.73
171.22
171.65
172.18
172.58
A-F
1.08
2.13
3.03
2.35
2.28
1.52
1.6
1.47
2.08
2.15
1.32
0.92
MSE
RMSE
(A-F)^2
1.17
4.55
9.2
5.52
5.21
2.3
2.56
2.15
4.34
4.62
1.73
0.84
3.68
1.92
Running Head: Questions for Critical Thinking 3 3
RMSE w/0.3=0.254
RMSE w/0.7 =0.192
Therefore the better forecast would be RMSE w/ 0.7
Based on the excel spreadsheet provided because of the low RMSE, the moving average method
is better than the exponential smoothing method. Low RMSE =better performance.
2. 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.
3. Appendix problem 3: Compare RMSEs for moving average and exponential forecasts to answer
“Is this a better forecast than the moving average?” (see also p. 237). Use 166.63, the mean of all
36 months, as the initial forecast for Jan. 1998 for both exponential smoothing forecasts.
3. Forecast the data for 2000 again in problem 1 with exponential smoothing
with w = 0.3 and w = 0.7. Is this a better forecast than the moving average?
Time
Jan-00
Feb-00
Mar-00
Apr-00
May-
00
Jun-00
Jul-00
Aug-00
Sep-00
Oct-00
Nov-00
Dec-00
CPI
167.9
169.3
170.7
170.6
171.1
171
171.7
172.2
173.3
173.8
173.5
173.5
forecast(w=0.3)
166.85
167.17
167.81
168.67
169.25
169.81
170.16
170.63
171.1
171.76
172.37
172.71
MSE
RMSE
(A-F)^2
1.1
4.55
8.37
3.71
3.41
1.42
2.36
2.48
4.85
4.17
1.28
0.62
3.19
1.79
forecast(w=0.7)
167.24
167.7
168.82
170.14
170.46
170.91
170.97
171.48
171.98
172.91
173.53
173.51
MSE
RMSE
(A-F)^2
0.44
2.55
3.53
0.22
0.41
0.01
0.53
0.52
1.73
0.8
0
0
0.89
0.95
a. Discussion Questions: 3, 11, and
13. b. Problems: 4, 10, and 13.
Running Head: Questions for Critical Thinking 3 4
According to the marginal productivity theory wages equal labors marginal revenue product and
an increase in labor productivity should be reflected in a similar wage increase. This increase
would demand more productivity and in turn would demand skilled laborers. Considering this,
unskilled laborers would not be hired or they will lose their jobs and be replaced by skilled labor
that would increase productivity.
The TP curve increase at an increasing rate so that the MPRL Rrises as more labor is used. The decli
portion of the MPRLR curve is a reflection of the law of diminishing returns. Therefore the total
product declines after a point even with increased variable input of the firm after a point of
diminishing returns.
3( b) What is the relationship between diminishing returns and the stages of production?
Based on the law of diminishing returns Stage II of production where the MP of both factors is
positive but declining. Stage I the production is higher and in stage III the labor is less so Stage II
would be ideal.
Salvatore Chapter 7:
3( a) how is the law of diminishing returns reflected in the shape of the total product curve?
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.
Running Head: Questions for Critical Thinking 3 5
The marginal cost for both cases is $100, however in opening the store for an extra two hours
the
sales is 200 unites more when compared to renting additional equipment. Mr Wilson’s best
option is to open the store for an additional 2 hours and pay the marginal cost of $100
Ms. Smith should hire only 5 workers, at this point her profit is at its highest and equal to the
marginal cost. If she hires more than 5 workers her income generated decreases and she would inc
loss.
Note:
1. P4: Ms. Smith should hire workers as long as their marginal revenue product (MRP) exceeds their
marginal resource cost (MRC) and until MRP=MRC.
2.
MRP=MR x MP = P x MP = $10 x MP (use information in the problem to calculate MP).
MRC=wages=$40.
3. 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?
Workers Hired 0 1 2 3 4 5 6
Total Product 0 12 22 30 36 40 42
Marginal product 0 12 10 8 6 4 2
Marginal Cost per product
10 10 10 10 10 10 10
Marginal Revenue 0 120 100 80 60 40 20
Marginal Cost per worker 40 40 40 40 40 40
10. John Wilson, the owner of a fast-food restaurant, estimated that he can sell 1000 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 hamburgers 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?
Running Head: Questions for Critical Thinking 3 6
True: External economies of scale may result if a larger industry allows for more efficient
provision of services or equipment to firms in the industry.
3. P13(a): See figure 7-4 on page 280.
Submit this assignment by 11:59 p.m. (ET) on Sunday of Module/Week 3.
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
True: As more output reduces the marginal output will continue to increase but at a diminishing rate.
( b) If large and small firms operate in the same industry, we must have constant returns to scale.
