Business School

ADA University
ECON 6100 Economics for Managers
Instructor: Dr. Jeyhun Mammadov
Student:
Exam duration: 18:45-21:30.

Final Exam

Total points: 40 points

Question 1 (5 points)

Given the data below, make an appropriate forecast for the following year:

Period Demand
(Yt)
1 20
2 21
3 19
4 20
5 18
7 17
8 ?

- using a 3-period moving average

1 20
2 21
3 19
4 20
5 18
7 17
8 18.3333333
We find the average of previous 3 years and it equals 18.333
- using a naive forecast for period 8
For Naïve forecast we apply the growth rate from period 5 to 7 to the period 7 to 8 and find the value
required. Growth rate from period 5 to 7 is -5.556% and the value for period 8 is 16.0555555

1 20
2 21
3 19
4 20
5 18
7 17
8 16.05555556

- using an exponential smoothing (an alpha of 0.4 and period 1 as the initial forecast). Also, briefly
explain what is the “exponential smoothing”, and when is it most effective?
1 20 #N/A
2 21 20
 3 19 20.4
4 20 19.84
5 18 19.904
7 17 19.1424
8 18.28544

Exponential smoothing is a technique for smoothing data in preparation for presentations or

forecasting. If we have a time series with a easily determined and clear pattern, you can predict
using moving averages; however, if the time series lacks a clear pattern, you can forecast using
exponential smoothing. Exponential Smoothing gives weights to observations that decrease
exponentially with the increase in period. In other words, current data are weighted more
heavily than older ones in predicting.
- using a linear trend line. Also briefly explain the “trend analysis”.

Here we plug in the period 8 instead of x and get the value of sales in period 8. Y=-0.5857*8
+21.314=16.6284.

Trend analysis is a widely used technique for gathering data and trying to identify patterns.
Trend analysis is often used to refer to methods for identifying an underlying pattern of behavior
in a time series that might otherwise be obscured by noise. If it is assumed that the trend is
linear, trend analysis may be conducted inside a formal regression analysis.
Question 2 (5 points)

ABC company has recorded the following sales (000 omitted).

Year Sales, $
1994 12
1995 23
1996 32
1997 43
1998 65
1999 85
2000 120
2001 140
2002 170
2003 210
2004 260
2005 ?
 a. Compute 2005 sales, using the method of least squares

From the scatter plot, we see that the sales have exponential growth pattern. And for the year
of 2005, we would have 454.59612388.

b. Compute the coefficient of determination. Explain it.

Coefficient of determination is R-squared of the trendline which equals 0.9717, meaning that
the linear trendline explains the 97.17% behavior of the sales volume.
c. Comment on the reliability of the estimated sales equation, together with the necessary
assumptions if the estimated equation is to be used to predict sales.
Given the R-squared value of 0.9717 which is quite high, we can say that our prediction is doing
well. However, we also need to consider that we have only 11 observations which is quite small.
So, more observations would be to have more robust estimates.

Question 3 (3 points)

A film processor company has the following production function:

Q = 0.4K2 + 0.2KL + 0.3L2

Assume a weekly rate of use where L = 100 labor hours and K = 50 film developing hours. Determine the
following:

a. The total product per week.

Q=0.4x50^2 + 0.2x100x50+0.3x100^2=1000+1000+3000=5000 product per week
b. The marginal product of labor.
We take first order condition with respect to Labor  0.2K+0.6L = 0.2x50 + 0.6x100=70
c. The marginal product of capital.
We take first order condition with respect to capital  0.8K + 0.2 L = 60

Question 4 (2 points)

A company has developed the following production function for its coal output:

Q = 5L0.5K0.5

a. Determine return to scale, and comment on it.

If we increase our factors of input by some amount m we would have Q= 5L 0.5m0.5K0.5m0.5. Our
production function would increase exactly by m. So, we have constant returns to scale.
 b. Determine returns to scale for each factor input.
For each factor input, the returns to scale is decreasing because they have the power which is
between 0 and 1. If we increase labor by 100 units holding other things constant, the production
will increase by 10.
Question 5 (4 points)

The total product of labor (per hour) for a firm is given by:

Q = 20L – 0.4L2

a. Determine the marginal product of labor.

We take FOC with respect to Labor and set it equal to zero.  20-0.8L= 0
20=0.8L
L=25
b. How many workers should the firm employ if the wage rate is $20 per hour and the marginal
revenue product is $25.
The firm would hire workers until the marginal revenue product is equal to the wage.
(20-0.8L)*20=25
400-16L=25
L=23.44 units of Labor.

Question 6 (3 points)

What is marginal revenue product (MRP)? What is its significance in profit maximization?

Question 7 (3 points)

Given the cost function for your firm: TC = 20 +2Q +Q 2

a. What is the average fixed cost (AFC) of producing 5 units of output?
Fixed cost is constant over the number of units produced. AFC=20/5=4
b. What is the average variable cost (AVC) of producing 5 units of output?
Variable Cost is the cost other than the constant  2Q +2Q2= 10+50=60
AVC=60/5=12
c. What are the average total cost (ATC) and marginal cost (MC) of producing 5 units of output?
AVC= (20+60)/5= 16, MC=2+2Q= 2+5x2=12
Question 8 (7 points)

Given the following total cost (TC) function:

TC = 90 + 60Q - 2Q2 + 0.02Q3

a. Calculate the marginal cost (MC), average variable cost (AVC), average cost (AC), and average
fixed cost (AFC) functions.
MC= 60-4Q+0.06Q2
Average Variable Cost= Variable Cost/Q= 60Q/Q-2Q 2/Q + 0.02Q3/Q = 60-2Q+0.02Q2
Average Fixed Cost= 90/Q
b. At what level of output does MC reach its minimum? AVC? AFC?
At level where MC=AVC , MC reaches its minimum
At level when MC=AVC, AVC also reaches its minimum
At the maximum Q can be produces, AFC would be at its minimum

c. Determine MC and AVC when AVC is at its minimum.

MC=AVC
60-4Q+0.06Q2 = 0
Q= (4+1.26)/0.12 = 43.83, we plug in 43.83 instead of Q into our AVC function
AVC= 10.76
d. Prove that short-run MC equals AVC when AVC is at its minimum.
AVC at its minimum happens when we take its derivative with respect to Q.
AVC’= 60-4Q+0.06Q2, which is exactly our MC equation

Question 9 (5 points)

ABC has recently purchased a plan to manufacture a new product. The following data pertain to the
operation.

Total Per unit Percentage

Estimated sales (3500 units) 3500*20=70000$ $20 100%
Estimated costs: 70000$ $20 100%
Direct materials units 3500$ $6 5%
Direct labor 17500$ $1 25%
Selling expenses 70000*0.3=21000$ 6$ 30%
per year
Factory overhead (all fixed) $12000 per year 3.42 12000/70000*100=17.14%
Administrative expenses (all $16000 per year 4.57 22.86%
fixed)

- Determine the break-even point in units and in dollars.

Breakeven point occurs when TR-TVC-TFC=0
70000-TVC(3500+17500+21000)- TFC(12000+16000) = 0
- Explain the “break-even analysis”.
Thus, we have a total of $7000 in sales and must consequently have $7000 in total expenses at the
break-even point. We were provided the factory's cost and its per-unit cost and used that information to
calculate the percentage by dividing 12000 by 70000. Likewise, for administrative costs. After deducting
selling costs, we were left with 30% of the money and a deficit of 21000 from the original 70000. And,
using the per-unit pricing, we discovered the ratio of 1 to 6, and therefore the overall cost.
Question 10 (3 points)

List the assumptions of “perfect competition”. What are the differences between “perfect competition”
and “monopolistic competition”?
Answer:
The term "perfect competition" refers to an idealized market system that meets the following
criteria: Each company offers the same products. Each enterprise is a price taker (they cannot
influence the market price of their product). Market share makes little difference on price.
Buyers are well informed about the merchandise being offered and the prices paid by each
business. The materials necessary for this kind of job are entirely transportable. Businesses may
enter or exit the market at no cost. In a monopolistic market, a single business has full control
over the price and supply of goods and services. In contrast to a monopolistic market, a
completely competitive market is defined by the existence of many companies and the lack of
any one company achieving market domination. In the real world, no market is entirely
monopolistic or wholly competitive. Each market in the real world is a mix of these two market
types.