Question # 1

 

ABC company believes that it can increase labor productivity and, therefore, net revenue by reducing waste in its factories.It estimates that the marginal cost function for reducingpollution by installing additional capital equipment is

MC = 40P

where P represents a reduction of one unit of waste at the company.It also feels that for every unit of pollution reduction the marginal increase in revenue (MR) IS

MR = 1,000 - 10P

 

How much waste reduction should ABC company undertake?Managerial Economics 

 

Marginal Analysis for Optimal Decisions

 

 

Question # 1

 

ABC company believes that it can increase labor productivity and, therefore, net revenue by reducing waste in its factories.  It estimates that the marginal cost function for reducing  pollution by installing additional capital equipment is

MC = 40P

where P represents a reduction of one unit of waste at the company.  It also feels that for every unit of pollution reduction the marginal increase in revenue (MR) IS

MR = 1,000 - 10P

 

How much waste reduction should ABC company undertake?

 

 

Question #2

 

XYZ Manufacturing Inc. has discovered a theft problem at its warehouse and has decided to here security guards.  The manufacturing company wants to hire the optimal number of security guards.  The following table shows how the number of security guards affects the number of televisions  stolen per week

Number of Security Guards Number of TVs stolen per week

0 50

1 30

2 20

3 14

4 8

5 6

 

a) If each security guard is paid $200 a week and the cost of a stolen TV is $25, how many security guards should the firm hire?

 

b) If the cost of a stolen TV is $25, what is the most the firm would be willing to pay to hire the first security guard?

 

c) If each security guard is paid $200 a week and the cost of a stolen TV is $50, how many security guards should the firm hire?

 

 

 

Basic Estimation Techniques

 

Question # 3 (see next page)

The director of Robinson Inc. believes that sales of the company's toothpaste (S) are related to Robinson's own advertising expenditure (A), as well as the combined advertising  expenditures of its three biggest rival toothpaste (R). The marketing director collects 36 weekly observations on S, A, and R to estimate the following multiple regression equation:

 

S = a + bA + cR

 

where S, A and R are measured in dollars per week.  Robinsons Inc.'s marketing director is comfortable using parameter estimates that are statistically significant at the 10 percent level or better.

 

a)  What sign does the marketing director expect a, b, and c to have?

b) Interpret  the coefficients a, b and c.

 

 

The regression output from the computer is as follows:

 

DEPENDENT VARIABLE : S R-SQUARE F-RATIO P-VALUE ON  F

OBSERVATIONS :   36 0.2247 4.781 0.0150

 

PARAMETER STANDARD

VARIABLE ESTIMATE ERROR T-RATIO P - VALUE

INTERCEPT 175086.0 63821.0 2.74 0.0098

A 0.8550 0.3250 2.63 0.0128

R -0.284 0.164 -1.73 0.0927

 

 

c) Does Robinson Inc's advertising  expenditure have a statistically significant effect on the sales of toothpaste?  Explain, using the appropriate p-value.

 

d) Does advertising  by its three largest rivals affect sales of toothpaste in a statistically significant way?  Explain, using the appropriate p-value

 

e) What fraction of the total variation in sales of toothpaste remains unexplained?  What can the marketing director do to increase the explanatory power of the sales equation?  What other explanatory variables might be added to this equation?

 

f) What is the expected level of sales each week when Robinsons Inc spends $40 000 per week and the combined advertising expenditure for the three rivals are $100 000 per week?