Managerial Economics

Paper instructions:

Textbook:
Baye and Prince, Managerial Economics and Business Strategy, 8th edition. ISBN:
978-0-07-771629-5.
Part I: Short answer.
1) 1 – Regression analysis determined that in a competitive market, market
demand is
Qhd = 100 – 8Ph + 6Pb – M, where Qhd is the quantity of hot dogs consumed, Ph
is the price of a hot dog, Pb is the price of a beer, and M is income. If Ph = $4,
Pb = $2, and M = $10, find all of the relevant elasticities. Explain what each of
these elasticities tell you about the hot dog market.
2) Rice and beans are substitutes. A drought in Thailand destroys much of the rice
crop, while Brazil experiences plentiful rainfall and a bumper crop of beans.
What do you expect to happen to the equilibrium price and quantity of beans?
Explain your answer, then illustrate using a well-labeled graph(s).
Part II: Problems. Answer all parts of each of the questions below. Be sure to
SHOW all of your work!
1) Attendance at sports events depends on various factors. Teams typically do not
change ticket prices from game to game to attract more spectators to less
attractive games. However, there are other marketing tools used, such as
fireworks, free hats, etc., for this purpose. You work as a consultant for a sports
team, the Los Angeles Dodgers, to help them forecast attendance, so that they
can potentially devise strategies for price discrimination. After collecting data
over two years for every one of the 162 home games of the 2000 and 2001
season, you run the following regression:
= 15,005 + 201 × Temperat + 465 × DodgNetWin + 82 × OppNetWin
+ 9647 × DFSaSu + 1328 × Drain + 1609 × D150m + 271 × DDiv – 978
× D2001;
=0.416, SER = 6983
where Attend is announced stadium attendance, Temperat it the average
temperature on game day, DodgNetWin are the net wins of the Dodgers before
the game (wins-losses), OppNetWin is the opposing team’s net wins at the end
of the previous season, and DFSaSu, Drain, D150m, Ddiv, and D2001 are binary
(dummy) variables, taking a value of 1 if the game was played on a weekend, it
rained during that day, the opposing team was within a 150 mile radius, the
opposing team plays in the same division as the Dodgers, and the game was
played during 2001, respectively.
a. Interpret the regression results. Do the coefficients have the expected
signs? Explain.
b. Are the variables used good predictors of attendance? If yes, explain
why. If not, explain what other information you would need to make this
determination.
c. Excluding the last four binary variables results in the following regression
result:
= 14,838 + 202 × Temperat + 435 × DodgNetWin + 90 × OppNetWin
+ 10,472 × DFSaSu, =0.410, SER = 6925
According to this regression, what is your forecast of the change in attendance
if the temperature increases by 30 degrees? Is it likely that people attend more
games if the temperature increases? Is it possible that Temperat picks up the
effect of an omitted variable?
d. Assuming that ticket sales depend on prices, what would your policy
advice be for the Dodgers to increase attendance?
2) Kellen has $300 to spend each week, which she can use either to purchase
soccer balls (s) or ice cream (I). Soccer balls are $25 each while ice cream is $6 each.
a) What is the equation for Kellen’s budget line?
b) Graph Kellen’s budget constraint (put soccer balls on the Y axis).
c) What is the market rate of substitution for soccer balls and ice cream?
d) Using the graph you drew in part (b) above, show what happens the ice
cream parlor has a sale on ice cream, so that ice cream is now $3 each.
Explain what is happening.
e) Again using the graph you drew in part (b) above, add in an indifference
curve showing where Kellen’s equilibrium consumption would be (given the
new price levels). Label the equilibrium E on the graph.
F)Given the change in the graph that you drew in part (e), show the change in
ice cream consumption due to the substitution effect and the change
in ice cream consumption due to the income effect. Explain how you determined each
of these changes
Part III: Writing. Write a short essay (2-3 paragraphs) to answer each of the questions
below.
1) Qx = 100 – 5Px – 4Py + 12M + 2Ax – 4Ay, where Px is the price of good X, Py is
the price of good Y, M is income, Ax is advertising expenditures on good X, and
Ay is advertising expenditure on good Y. You have been instructed to prepare a
report detailing all of the ways that your company, which sells good X, can
increase sales. Using the above demand function, create your action plan,
detailing the ways in which your employer can increase sales. In your report,
discuss the limitations of your analysis.
2) Your company approaches you and asks you to determine the feasibility of
expanding a nearby store. Format your action plan, including the data you
would request and how you would use this data. Be sure to address what you
predict to happen to profits/revenues for your company
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