DR. ABRAHAM C. CAMBA JR.Department of Economics, San Beda College, Mendiola, Manila

and Polytechnic University of the Philippines, Sta. Mesa, Manila

Managerial Economics - ECO10TUTORIAL SESSIONS

PART THREE

SESSION 1: FORECASTING USING TREND ANALYSIS (30 points).

Given the linear trend and log-linear trend for copper sales of Malanday Mining Corp. (in thousands of tons) from the 1st quarter of 2001 to the last quarter of 2004.

Linear Trend Equation:St = 364.66 + 6.475tt-stat (1.96)Adjusted R2 = 0.16

Log-linear Trend Equation:LnSt = 5.89 + 0.016tt-stat (2.07)Adjusted R2 = 0.18

Note: USE NATURAL LOGARITHM (Ln function in your calculator)!

A) Forecast copper sales of Malanday Mining Corp. using the linear and log-linear trend equations in each quarter of 2005.

B) Which form of the trend equation fits the historical data better?

SESSION 2: FORECASTING USING REGRESSION ANALYSIS (20 points).

Office Enterprise (OE) produces a line of metal office file cabinets. The company’s economist, having investigated a large number of past data, has established the following equation of demand for these cabinets:

Q = 10,000 + 60B – 100P + 50C

where Q – annual number of cabinets soldB – index of nonresidential constructionP – average price per cabinet charged by OEC – average price per cabinet charged by OE’s closest competitor

It is expected that next year’s nonresidential construction index will stand at 160, OE’s average price will be Ph40, and the competitor’s average price will be Ph35.

DR. ABRAHAM C. CAMBA JR.Department of Economics, San Beda College, Mendiola, Manila

and Polytechnic University of the Philippines, Sta. Mesa, Manila

A. Forecast next year’s sales.B. What will be the effect if the competitor lowers its price to

Ph32? If it raises its price to Ph36?C. What will happen if OE reacts to the decrease mentioned in

part B by lowering its price to Ph37?D. If the index forecast was wrong, and it turns out to be only

140 next year, what will be the effect on OE’s sales?

SESSION 3: CAPITAL BUDGETING (20 points).

Two mutually exclusive alternatives, projects C and D, have the following investments and cash flows:

Project C

Project D

Investment at period t = 0

Ph40,000

Ph40,000

Cash inflow at t = 1 10,000 20,500Cash inflow at t = 2 10,000 20,500Cash inflow at t = 3 47,000 20,500

The company’s cost of capital is 12 percent.

A. Calculate the net present value and profitability index of each project

B. Which of the two projects would you accept? Explain.

SESSION 4: PRICING PRACTICES – PRICE DISCRIMINATION (30 points).

Suppose the demand functions (and inverse demand functions) for three market segments are

q1 = 1,000 – 100p1 p1 = 10 – (1/100)q1

q2 = 1,000 – 50p2 p2 = 20 – (1/50)q2

q3 = 1,000 – 20p3 p3 = 50 – (1/20)q3

and costs are, for output q, C(q) = 1,000 + 5q

A. What are the profit-maximizing prices and outputs in the three market segments, and hence the firm’s profits?

B. Suppose the monopolist is constrained to charge the same price in these market segments. What is the profit-maximizing price and the

DR. ABRAHAM C. CAMBA JR.Department of Economics, San Beda College, Mendiola, Manila

and Polytechnic University of the Philippines, Sta. Mesa, Manila

firm’s profit level in this case? Does total output change in moving from price discrimination to uniform pricing?

Date of submission: September 16, 2009

References:

1. Economics for Managers (2008) by James R. McGuigan, R. Charles Moyer, and Frederick H. deB. Harris.

2. Managerial Economics: Economic Tools for Today’s Decision Makers (2006) by Paul G. Keat and Philip K.Y. Young.

3. Managerial Economics (2008) by Christopher Thomas and Maurice S. Charles.