economics 1579167 2

Salvatore’s Chapter 6

Discussion Questions

1. (a) What is forecasting? Why is it so important in the management of business firms and other enterprises? (b) What are the different types of forecasting? (c) How can the firm determine the most suitable forecasting method to use?

7. (a) Which type of smoothing technique is generally better? (b) How do we determine which of two smoothing techniques is better? (c) How can we forecast the values of a time series that contains a secular trend as well as strong seasonal and random variations?

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 diffusion index from month 2 to 3. (In this problem, we have three leading indicators. The diffusion index from month 1 to 2 is 66.7 (=2/3) because two indicators move up and move down (see p. 236)


Leading Indicator A

Leading Indicator B

Leading Indicator C














Appendix Problems

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?

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? (Compare RMSEs for moving average and exponential forecasts to answer “Is this a better forecast than the moving average” (see also p.234) Use 166.63, the mean of all 36 months, as the initial forecast for Jan. 1998 for both exponential smoothing forecast.

Salvatore’s Chapter 7

Discussion Questions

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?

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.

12. It is always better to hire a more qualified and productive worker than a less qualified and productive one regardless of cost. True or false? Explain.


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? (Ms. Smith should hire workers as long as their marginal revenue product (MRP) exceeds their marginal resource cost (MRC)and until MRP=MRC.

MRP=MR x MP = P x MP = $10 x MP (use information in the problem to calculate MP)


Workers hired








Total product









 12. Suppose that the production function for a commodity is given by

Q = 10 √LK

where Q is the quantity of output, L is the quantity of labor, and K is the quantity of capital. (a) Indicate whether this production function exhibits constant, increasing, or decreasing returns to scale. (b) Does the production function exhibit diminishing returns? If so, when does the law of diminishing returns begin to operate? Could we ever get negative returns? (P12(a) Calculate Q when L=1 and K=, and L=2 and K=2. Then compare and answer the question about the returns to scale). (P12(b) Given K=1, show the change in Q if L changes from 1 to 2 and 2 to 3. Answer the question about diminishing returns)

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. (P13(a) See figure (7-4) on page 276)


(References required for project in APA format)

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