Mid Term managerial econ ch 1-5

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ECONOMIC ANALYSIS AND DECISIONS

answer

1. Demand Analysis
2. Production and Cost Analysis
3. Product, Pricing, and Output Decisions
4. Capital Expenditure Analysis

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ECONOMIC, POLITICAL, AND SOCIAL ENVIRONMENT

answer

1. Business Conditions (Trends, Cycles, and Seasonal Effects)
2. Factor Market Conditions (Capital, Labor, and Raw Materials)
3. Competitors' Reactions and Tactical Response
4. Organizational Architecture and Regulatory Constraints+-

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Managerial economics

answer

1. the application of microeconomics to problems faced by decision-makers in the private, public, and not-for-profit sectors.
2. assists managers in efficiently allocating scarce resources, planning corporate strategy, and executing effective tactics.

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Decision making Elements

answer

1. establish the objectives
2. identify the problem
4. examination of potential solutions
5. analysis of the relative costs and benefits
6. sensitivity analysis
7. implementation of the decision

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Effective managers

answer

1. Teamwork skills
2. the ability to motivate teams

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Economic profit

answer

The difference between total revenue and total economic cost. Economic cost includes a "normal" rate of return on the capital contributions of the firm's partners.
2. Helps determines the type and quantity of goods and services that are produced and sold, as well as the resulting derived demand for resources.

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Economic costs

answer

should always be thought of as opportunity costs—that is, the costs of attracting a resource such as investment capital from its next best alternative use.

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Innovation theory of profit

answer

1. above-normal profits are the reward for successful innovation
2. We'd expect high-profit areas to attract investment.
3. We'd expect low-profit areas to lose investment.

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Shareholder wealth

answer

1. A measure of the value of a firm.
2. Shareholder wealth is equal to the value of a firm's common stock, which, in turn, is equal to the present value of all future cash returns expected to be generated by the firm for the benefit of its own

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Shareholders are

answer

principals

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managers are

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agents

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Agency costs

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Costs associated with resolving conflicts of interest among shareholders, managers, and lenders.
1. grants of restricted stock or deferred stock options to structure executive compensation in such a way as to align the incentives for management with shareholder interests.
2. internal audits and accounting oversight boards to monitor management's actions. These initiatives strengthen the firm's corporate governance.
3. bonding expenditures and fraud liability insurance to protect the shareholders from managerial dishonesty.
4. Complex internal approval processes designed to limit managerial discretion, but which prevent timely responses to opportunities.

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NPV was invented to

answer

1. to value bonds where all the cash flows are known and guaranteed by contract.
*No one possesses a right to receive profit or surpluses in an NFP enterprise.

question

Managers should concentrate on

answer

- maximizing shareholder value alone only if three conditions are met.
1. complete markets
2. no significant asymmetric information
3. known recontracting costs.

question

Public goods

answer

Goods that may be consumed by more than one person at the same time with little or no extra cost, and for which it is expensive or impossible to exclude those who do not pay

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Cost-benefit analysis

answer

A resource-allocation model that can be used by public sector and not-for-profit organizations to evaluate programs or investments on the basis of the magnitude of the discounted costs and benefits.

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NFP spending

answer

Normally constrained by a budget ceiling
the goals actually used in practice can be any one of the following
1.Maximize the benefits for given costs
2.Minimize the costs while achieving a fixed level of benefits
3.Maximize the net benefits (benefits minus costs).

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COMPLETE MARKETS

answer

liquid markets for firm's inputs and by-products (including polluting by-products).

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No asymmetric information

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Future input costs are part of the present value of expected cash flows.

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Shareholders have a residual claim

answer

on the firm's net cash flows.

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All other stakeholders have

answer

have contractual expected returns

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4 Important Fundamental Microeconomic Concepts

answer

1. demand and supply
2. marginal analysis
3. net present value
4. the meaning and measurement of risk

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Demand and supply simultaneously

answer

determine equilibrium market price

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supply and demand are

answer

explicitly rates per unit time period

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Demand

answer

-A potential concept often distinguished from the transactional event of "units sold."
-the potential sales concept of customer traffic

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supply

answer

is like scenario planning for operations than it is like actual production, distribution, and delivery.

question

Equilibrium market price results

answer

from the interaction of demanders and suppliers involved in an exchange

question

a supplier's variable cost will

answer

also influence the market price observed

question

equilibrium price in a marketplace is related

answer

1. intrinsic use value
2. Production cost
3. input scarcity

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Marginal Use Value

answer

The additional value of consumption of one more unit
*The greater the utilization already, the lower the use value remaining.

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marginal utility

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The use value obtained from the last unit consumed.

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Individual Demand Curve

answer

the greatest quantity of a good demanded at each price the consumers are willing to buy, holding other influences constant

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demand schedule (demand curve)

answer

-the simplest form of the demand relationship.
-It's a list of prices and corresponding quantities of a commodity that would be demanded by some individual or group of individuals at uniform prices.

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demand functions

answer

The relationship between quantity demanded perunit of time and all the determinants of demand.

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Substitute goods

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Alternative products whos edemand increases when the price of the focal product rises.

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Complementary goods

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Complements in consumption whose demand decreases when the price of the focal product rises

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supply function

answer

A relationship between quantity supplied and all the determinants of supply.

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Supply schedule

answer

is a list of prices and corresponding quantities that an individual or group of seller's desires to sell at uniform prices

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changes in the price (P) of the good or service will result

answer

only in movement along the given supply curve

question

As with demand, a movement along a supply curve is referred to as a

answer

change in the quantity supplied, while holding constant other determinants of supply.

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supply curve

answer

A relationship and quantity supplied per unit time, holding other determinants of supply constant.

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marginal analysis

answer

A basis for making various economic decisions that analyzes the additional (marginal) benefits derived from a particular decision and compares them with the additional (marginal) costs incurred.

-One of the most useful concepts in microeconomics.
"marginal cost equals marginal revenue
-Long-term investment decisions (capital expenditures) also are made using marginal analysis decision rules
-marginal analysis instructs decision makers to determine the additional(marginal) costs and additional (marginal) benefits associated with a proposed action.
-Only if the marginal benefits exceed the marginal costs should the action be taken.

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Marginal return as the difference between marginal benefits and marginal costs

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then an equivalent optimality condition is that the level of the activity should be increased to the point where the net marginal return is zero.

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When costs and benefits occur at approximately the same time,

answer

the marginal decision rule applies.

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present value

answer

The value today of a future amount of money or a series of future payments evaluated at the appropriate discount rate.

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Risk

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A decision-making situation in which there is variability in the possible outcomes, and the probabilities of these outcomes can be specified by the decision maker.

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probability

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The percentage chance that a particular outcome will occur.

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expected value

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The weighted average of the possible outcomes where the weights are the probabilities of there spective outcomes

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standard deviation

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A statistical measure of the dispersion or variability of possible outcomes.

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coefficient of variation

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The ratio of the standard deviation to the expected value. A relative measure of risk

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Average profit increases

answer

as long as marginal profit exceeds average profit.

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Maximizing average profit doesn't

answer

doesn't maximize total profit.

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We will be using the bell curve and the concepts around it to help

answer

us make critical decisions about our analysis.

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Demand analysis

answer

Provides the insights necessary for marketing teams to manage demand effectively.
Helps forecast unit sales to inform operations decisions.
Projects the revenue portion of a firm's cash flow stream for financial planning.
(1)It provides the insights necessary for the effective management of demand.
(2)It aids in forecasting sales and revenues.
(3) It projects the revenue portion of a firm's cash flow stream.

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Price elasticity of demand

answer

A measure of the sensitivity of quantity demanded to a change in one of the factors influencing demand
* price, advertising, promotions, packaging, or income levels.

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The demand schedules

answer

-the simplest form of the demand relationship
a list of prices and corresponding quantities of a -- --^product or service that would be demanded over a particular time period
-the lower the price, the greater the quantity demanded

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Substitution effect

answer

as the price declines, the good becomes relatively cheaper. A rational consumer maximizes satisfaction by reorganizing consumption until the marginal utility in each good per dollar is equal. We buy more.

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-Purchasing power effect

answer

as the price of goods declines, the consumer can purchase more of all goods since his or her real income increases. So, as the price falls, we typically buy more.

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law of demand"

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The movement down a single demand schedule.

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A shift of demand schedule

answer

Demand schedules shift when one of the determinants of demand discussed
Example: gas guzzler cars had lower sales when gas prices went up.

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Purchasing Power

answer

When the price of a good declines, the effect of this decline is that the purchasing power of the con-sumer has increased (purchasing power effect of the price change)
Consumers Savings= increased purchasing power

Which could mean the ability to purchase more
Sign and magnitude of the purchasing power effect of a price change has to do with the positioning and targeting decisions in the firm's marketing plan
whether the product is upscale or down market positioned and at whom the product is targeted.

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Substitution Effects

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Result of price decline, the rational consumer can increase their satisfaction or utility by purchasing more of the good whose price has declined and less of the substitutes. (substitution effect of the price change)

Example: decrease in the relative price of movies versus restaurantmeals leads to an increase in the quantity demanded of movies.

the combined impact of the purchasing power and substitution effects, a decline in the price will always have a positive impact on the quantity demanded income-superior goods and services

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Implicit Demand Function

answer

Qd = F(P, PS,PC,Y,A,AC,N,Cp,Pe,Ta,T=S,Target;Switching Cost;Positioning)

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Targeting

answer

The subject of extensive marketing research using surveys, focus groups, and statistical analysis.

Inclinations and declinations of potential target customer groups before signing their promotions and ad campaigns.

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as purchasing power rises, any goods and services that the target households perceive as

answer

inferior to some preferable substitute will likely experience declining unit sales.

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Demand Determinants

answer

Controlled by management
price, advertising, product quality, and customer service
outside the direct control of the firm
disposable income and the prices of competitors' products

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Elasticity

answer

a ratio of the percentage change in quantity to the percentage change in a determinant

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Ceteris Paribus

answer

all other things remaining unchanged

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price elasticity of demand

answer

The ratio of the percentage change in quantity demanded to the percentage change in price assumes that all other factors influencing demand remain unchanged.

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Marginal revenue

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The change in total revenue results from a one-unit change in quantity demanded.

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Firms should always seek to raise prices for products

answer

discovered occupying the inelastic range of their demand.

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The most important determinant of the price elasticity of demand

answer

is the availability and perceived closeness of substitutes.

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Income elasticity

answer

The ratio of the percentage change in quantity demanded to the percentage change in income assumes that all other factors influencing demand remain unchanged.

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For most products, income elasticity is expected to be positive

answer

that is, Ey>0. Such goods are referred to as income-superior goods.

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Those goods having a calculated income elasticity t

answer

that is negative are called inferior goods.

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Advertising elasticity

answer

measures the responsiveness of sales to changes in advertising expenditures as measured by the ratio of the percentage change in sales to the percentage change in advertising expenditures.
The higher the advertising elasticity coefficient EA, the more responsive sales are to changes in the advertising budget.

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Cross price elasticity measured between Products A and B are positive =

answer

the two products are referred to as substitutes for each other.

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A negative cross-price elasticity, on the other hand, indicates that

answer

the two products are complementary.

question

Factors that affect demand change simultaneously

answer

determine their combined impact on the quantity demanded.
Advertising expenditures and competitors' prices are expected to remain the same in the next period.

question

Specification of the model

answer

formulate the demand model, select a Functional Form
Estimate the parameters
Develop forecasts from the model

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Dependent Variable

answer

quantity in units, quantity in dollar value (as in sales revenues)

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Independent Variables

answer

variables thought to influence the quantity demanded

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Simple Linear Regression: Assumptions

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The dependent variable is random.

A straight-line relationship exists.

Each value of X is associated with a probability distribution, p(y|x), of possible values of the Y. The error term has a mean of zero and a finite variance.

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A regression equation can be used to

answer

make predictions concerning the value of Y, given any particular value of X.

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A measure of the accuracy of estimation with the regression equation can be obtained by

answer

Calculating the standard deviation of the errors of prediction (also known as the standard error of the estimate).

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Econometrics

answer

is a collection of statistical techniques available for estimating such relationships

question

measuring demand relationships

answer

Regression
correlation analysis

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inverse demand function

answer

identifies the maximum price that can be charged

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standard error of the estimate

answer

The standard deviation of the error term in a regression model.

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coefficient of determination

answer

A measure of the proportion of total variation in the dependent variable that is explained by the independent variable(s).

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Autocorrelation

answer

-An econometric problem characterized by the existence of a significant pattern in the successive values of the error terms in a linear regression model.
-Negative autocorrelation reflects an undershooting and overshooting process like purchases of storable consumer goods
-Positive autocorrelation can result from cyclical and seasonal variation in economic variables.

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Heteroscedasticity An econometric

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Problem characterized by the lack of a uniform variance of the error terms surrounding the regression line.

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Multicollinearity An econometric

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Problem characterized by a high degree of intercorrelation among explanatory variables in a regression equation.

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Identification problem

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-A difficulty encountered in empirically estimating demand function by regression analysis.
-This problem arises from the simultaneous relationship between two functions, such as supply, and demand.

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the shareholder value of a firm depends on

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accurately forecasting these components of the expected future cash flows.

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GDP=

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Gross Domestic Product

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Forecasting significance

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*Both public and private enterprises operate under conditions of uncertainty.
•Management wishes to limit this uncertainty by predicting changes in cost, price, sales, and interest rates.
•Accurate forecasting can help develop strategies to promote profitable* trends and to avoid unprofitable ones.
•A forecast is a prediction concerning the future. Good forecasting will reduce, but not eliminate, the uncertainty that all managers feel.

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Forecasting Techniques

answer

1. Deterministic trend analysis
2. Smoothing techniques
3. Barometric indicators
4. Survey and opinion-polling techniques
5. Macro econometric models
6. Stochastic time-series analysis
7. Forecasting with input-output tables

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The accuracy of a forecasting model is

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measured by how close the actual variable, Y, ends up to the forecasting variable.

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A root mean square error

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RMSE, is used to evaluate the accuracy of a forecasting model; smaller the value of RMSE, greater the accuracy.

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two major categories for forecasting the value of a particular variable
time-series data

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time-series data- A series of observations taken on an economic variable at various points in time.

Cross-sectional data- Series of observations taken on different observation units (e.g., households, states, or countries) at the same point in time

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1. secular trends
2. cyclical variations

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1. Long-run changes (growth or decline) in an economic time-series variable.
2. Major expansions and contractions in an economic series that usually are longer than a year in duration.

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seasonal effects

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Variations in a time series during a year that tend to appear regularly from year to year.

Estimated by: Ratio-to-Trend Method (assumes that the trend value is multiplied by the seasonal effect)

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Dummy Variables

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is a variable that normally takes on one of two values—either 0 or 1.

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Random fluctuations

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an economic series may be influenced by random factors that are unpredictable such as hurricanes, floods, and tornados, as well as extraordinary government actions like a wage-price freeze or a declaration of war.

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Linear Trends

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A linear time trend may be estimated by using least-squares regression analysis to provide an equation of a straight line of "best fit."
Linear time trend forecasting is easy and inexpensive to do, but it is generally too simple and inflexible to be used in many forecasting circumstances.
Constant rate of growth time trends is one alternative.

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SMOOTHING TECHNIQUES

answer

A smoothing forecast method is used to eliminate distortions arising from random variations.
Best when data series tends to change slowly between periods
assumes that a repetitive underlying pattern can be found in the historical values of a variable that is being forecast.
taking an average of past observations, smoothing techniques attempt to eliminate the distortions arising from random variation in the series
are cheap to develop and inexpensive to operate.

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Survey and opinion-polling

answer

they may help to uncover if consumer tastes are changing or if business executives begin to lose confidence in the economy

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•Macroeconomic surveys include:

answer

-Plant and equipment expenditure plans
-Plans for inventory changes and sales expectations
-Consumer expenditure plans
-Sales force polling
-Surveys of consumer intentions

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Quantitative easing

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Expansionary monetary policy focused on longer term bonds and mortgage backed securities.

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transaction risk exposure

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A change in cash flows resulting from contractual commitments to pay in or receive foreign currency.

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translation risk exposure

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An accounting adjustment in the home currency value of foreign assets or liabilities.

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operating risk exposure

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A change in cash flows from foreign or domestic sales resulting from currency fluctuations.

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Sterilized interventions

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Central bank transactions in the foreign exchange market accompanied by equal off setting transactions in the government bond market, in an attempt to alter short-term interest rates without affecting the exchange rate.

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Arbitrage

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Buying cheap and selling elsewhere for an immediate profit.

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Speculation

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Buying cheap and selling later for a delayed profit (or loss).

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relative purchasing power parity

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A relationship between differential inflation rates and long-term trends in exchange rates.

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law of comparative advantage

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A principle defending free trade and specialization in accordance with lower relative cost.

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absolute cost advantage

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A comparison of nominal costs in two locations, companies, or economies.

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real terms of trade

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Comparison of relative costs of pro-duction across economies.

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internal hedge

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A balance sheet offset or foreign payables offset to fluctuations in foreign receipts attributable to exchange rate risk.

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free trade area

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A group of nations that have agreed to reduce tariffs and other trade barriers.

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value at risk

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The notional value of a transaction exposed to appreciation or depreciation because of ex-change rate risk.

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Maquiladora

answer

A foreign-owned assembly plant in Mexico that imports and assembles duty-free components for export and allows owners to pay duty only on the "value added."

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parallel imports

answer

which occur any time a foreign export product is purchased in one EU country for resale in another EU country.

1 of 125

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ECONOMIC ANALYSIS AND DECISIONS

answer

1. Demand Analysis
2. Production and Cost Analysis
3. Product, Pricing, and Output Decisions
4. Capital Expenditure Analysis

question

ECONOMIC, POLITICAL, AND SOCIAL ENVIRONMENT

answer

question

Managerial economics

answer

question

Decision making Elements

answer

1. establish the objectives
2. identify the problem
4. examination of potential solutions
5. analysis of the relative costs and benefits
6. sensitivity analysis
7. implementation of the decision

question

Effective managers

answer

1. Teamwork skills
2. the ability to motivate teams

question

Economic profit

answer

question

Economic costs

answer

should always be thought of as opportunity costs—that is, the costs of attracting a resource such as investment capital from its next best alternative use.

question

Innovation theory of profit

answer

1. above-normal profits are the reward for successful innovation
2. We'd expect high-profit areas to attract investment.
3. We'd expect low-profit areas to lose investment.

question

Shareholder wealth

answer

question

Shareholders are

answer

principals

question

managers are

answer

agents

question

Agency costs

answer

question

NPV was invented to

answer

1. to value bonds where all the cash flows are known and guaranteed by contract.
*No one possesses a right to receive profit or surpluses in an NFP enterprise.

question

Managers should concentrate on

answer

- maximizing shareholder value alone only if three conditions are met.
1. complete markets
2. no significant asymmetric information
3. known recontracting costs.

question

Public goods

answer

Goods that may be consumed by more than one person at the same time with little or no extra cost, and for which it is expensive or impossible to exclude those who do not pay

question

Cost-benefit analysis

answer

A resource-allocation model that can be used by public sector and not-for-profit organizations to evaluate programs or investments on the basis of the magnitude of the discounted costs and benefits.

question

NFP spending

answer

question

COMPLETE MARKETS

answer

liquid markets for firm's inputs and by-products (including polluting by-products).

question

No asymmetric information

answer

Future input costs are part of the present value of expected cash flows.

question

Shareholders have a residual claim

answer

on the firm's net cash flows.

question

All other stakeholders have

answer

have contractual expected returns

question

4 Important Fundamental Microeconomic Concepts

answer

1. demand and supply
2. marginal analysis
3. net present value
4. the meaning and measurement of risk

question

Demand and supply simultaneously

answer

determine equilibrium market price

question

supply and demand are

answer

explicitly rates per unit time period

question

Demand

answer

-A potential concept often distinguished from the transactional event of "units sold."
-the potential sales concept of customer traffic

question

supply

answer

is like scenario planning for operations than it is like actual production, distribution, and delivery.

question

Equilibrium market price results

answer

from the interaction of demanders and suppliers involved in an exchange

question

a supplier's variable cost will

answer

also influence the market price observed

question

equilibrium price in a marketplace is related

answer

1. intrinsic use value
2. Production cost
3. input scarcity

question

Marginal Use Value

answer

The additional value of consumption of one more unit
*The greater the utilization already, the lower the use value remaining.

question

marginal utility

answer

The use value obtained from the last unit consumed.

question

Individual Demand Curve

answer

the greatest quantity of a good demanded at each price the consumers are willing to buy, holding other influences constant

question

demand schedule (demand curve)

answer

-the simplest form of the demand relationship.
-It's a list of prices and corresponding quantities of a commodity that would be demanded by some individual or group of individuals at uniform prices.

question

demand functions

answer

The relationship between quantity demanded perunit of time and all the determinants of demand.

question

Substitute goods

answer

Alternative products whos edemand increases when the price of the focal product rises.

question

Complementary goods

answer

Complements in consumption whose demand decreases when the price of the focal product rises

question

supply function

answer

A relationship between quantity supplied and all the determinants of supply.

question

Supply schedule

answer

is a list of prices and corresponding quantities that an individual or group of seller's desires to sell at uniform prices

question

changes in the price (P) of the good or service will result

answer

only in movement along the given supply curve

question

As with demand, a movement along a supply curve is referred to as a

answer

change in the quantity supplied, while holding constant other determinants of supply.

question

supply curve

answer

A relationship and quantity supplied per unit time, holding other determinants of supply constant.

question

marginal analysis

answer

question

Marginal return as the difference between marginal benefits and marginal costs

answer

then an equivalent optimality condition is that the level of the activity should be increased to the point where the net marginal return is zero.

question

When costs and benefits occur at approximately the same time,

answer

the marginal decision rule applies.

question

present value

answer

The value today of a future amount of money or a series of future payments evaluated at the appropriate discount rate.

question

Risk

answer

A decision-making situation in which there is variability in the possible outcomes, and the probabilities of these outcomes can be specified by the decision maker.

question

probability

answer

The percentage chance that a particular outcome will occur.

question

expected value

answer

The weighted average of the possible outcomes where the weights are the probabilities of there spective outcomes

question

standard deviation

answer

A statistical measure of the dispersion or variability of possible outcomes.

question

coefficient of variation

answer

The ratio of the standard deviation to the expected value. A relative measure of risk

question

Average profit increases

answer

as long as marginal profit exceeds average profit.

question

Maximizing average profit doesn't

answer

doesn't maximize total profit.

question

We will be using the bell curve and the concepts around it to help

answer

us make critical decisions about our analysis.

question

Demand analysis

answer

question

Price elasticity of demand

answer

A measure of the sensitivity of quantity demanded to a change in one of the factors influencing demand
* price, advertising, promotions, packaging, or income levels.

question

The demand schedules

answer

question

Substitution effect

answer

question

-Purchasing power effect

answer

as the price of goods declines, the consumer can purchase more of all goods since his or her real income increases. So, as the price falls, we typically buy more.

question

law of demand"

answer

The movement down a single demand schedule.

question

A shift of demand schedule

answer

Demand schedules shift when one of the determinants of demand discussed
Example: gas guzzler cars had lower sales when gas prices went up.

question

Purchasing Power

answer

question

Substitution Effects

answer

question

Implicit Demand Function

answer

Qd = F(P, PS,PC,Y,A,AC,N,Cp,Pe,Ta,T=S,Target;Switching Cost;Positioning)

question

Targeting

answer

question

as purchasing power rises, any goods and services that the target households perceive as

answer

inferior to some preferable substitute will likely experience declining unit sales.

question

Demand Determinants

answer

Controlled by management
price, advertising, product quality, and customer service
outside the direct control of the firm
disposable income and the prices of competitors' products

question

Elasticity

answer

a ratio of the percentage change in quantity to the percentage change in a determinant

question

Ceteris Paribus

answer

all other things remaining unchanged

question

price elasticity of demand

answer

The ratio of the percentage change in quantity demanded to the percentage change in price assumes that all other factors influencing demand remain unchanged.

question

Marginal revenue

answer

The change in total revenue results from a one-unit change in quantity demanded.

question

Firms should always seek to raise prices for products

answer

discovered occupying the inelastic range of their demand.

question

The most important determinant of the price elasticity of demand

answer

is the availability and perceived closeness of substitutes.

question

Income elasticity

answer

The ratio of the percentage change in quantity demanded to the percentage change in income assumes that all other factors influencing demand remain unchanged.

question

For most products, income elasticity is expected to be positive

answer

that is, Ey>0. Such goods are referred to as income-superior goods.

question

Those goods having a calculated income elasticity t

answer

that is negative are called inferior goods.

question

Advertising elasticity

answer

question

Cross price elasticity measured between Products A and B are positive =

answer

the two products are referred to as substitutes for each other.

question

A negative cross-price elasticity, on the other hand, indicates that

answer

the two products are complementary.

question

Factors that affect demand change simultaneously

answer

determine their combined impact on the quantity demanded.
Advertising expenditures and competitors' prices are expected to remain the same in the next period.

question

Specification of the model

answer

formulate the demand model, select a Functional Form
Estimate the parameters
Develop forecasts from the model

question

Dependent Variable

answer

quantity in units, quantity in dollar value (as in sales revenues)

question

Independent Variables

answer

variables thought to influence the quantity demanded

question

Simple Linear Regression: Assumptions

answer

question

A regression equation can be used to

answer

make predictions concerning the value of Y, given any particular value of X.

question

A measure of the accuracy of estimation with the regression equation can be obtained by

answer

Calculating the standard deviation of the errors of prediction (also known as the standard error of the estimate).

question

Econometrics

answer

is a collection of statistical techniques available for estimating such relationships

question

measuring demand relationships

answer

Regression
correlation analysis

question

inverse demand function

answer

identifies the maximum price that can be charged

question

standard error of the estimate

answer

The standard deviation of the error term in a regression model.

question

coefficient of determination

answer

A measure of the proportion of total variation in the dependent variable that is explained by the independent variable(s).

question

Autocorrelation

answer

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Heteroscedasticity An econometric

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Problem characterized by the lack of a uniform variance of the error terms surrounding the regression line.

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Multicollinearity An econometric

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Problem characterized by a high degree of intercorrelation among explanatory variables in a regression equation.

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Identification problem

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-A difficulty encountered in empirically estimating demand function by regression analysis.
-This problem arises from the simultaneous relationship between two functions, such as supply, and demand.

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the shareholder value of a firm depends on

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accurately forecasting these components of the expected future cash flows.

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GDP=

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Gross Domestic Product

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Forecasting significance

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Forecasting Techniques

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The accuracy of a forecasting model is

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measured by how close the actual variable, Y, ends up to the forecasting variable.

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A root mean square error

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RMSE, is used to evaluate the accuracy of a forecasting model; smaller the value of RMSE, greater the accuracy.

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two major categories for forecasting the value of a particular variable
time-series data

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1. secular trends
2. cyclical variations

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1. Long-run changes (growth or decline) in an economic time-series variable.
2. Major expansions and contractions in an economic series that usually are longer than a year in duration.

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seasonal effects

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Variations in a time series during a year that tend to appear regularly from year to year.

Estimated by: Ratio-to-Trend Method (assumes that the trend value is multiplied by the seasonal effect)

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Dummy Variables

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is a variable that normally takes on one of two values—either 0 or 1.

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Random fluctuations

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Linear Trends

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SMOOTHING TECHNIQUES

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Survey and opinion-polling

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they may help to uncover if consumer tastes are changing or if business executives begin to lose confidence in the economy

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•Macroeconomic surveys include:

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-Plant and equipment expenditure plans
-Plans for inventory changes and sales expectations
-Consumer expenditure plans
-Sales force polling
-Surveys of consumer intentions

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Quantitative easing

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Expansionary monetary policy focused on longer term bonds and mortgage backed securities.

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transaction risk exposure

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A change in cash flows resulting from contractual commitments to pay in or receive foreign currency.

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translation risk exposure

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An accounting adjustment in the home currency value of foreign assets or liabilities.

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operating risk exposure

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A change in cash flows from foreign or domestic sales resulting from currency fluctuations.

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Sterilized interventions

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Arbitrage

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Buying cheap and selling elsewhere for an immediate profit.

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Speculation

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Buying cheap and selling later for a delayed profit (or loss).

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relative purchasing power parity

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A relationship between differential inflation rates and long-term trends in exchange rates.

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law of comparative advantage

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A principle defending free trade and specialization in accordance with lower relative cost.

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absolute cost advantage

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A comparison of nominal costs in two locations, companies, or economies.

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real terms of trade

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Comparison of relative costs of pro-duction across economies.

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internal hedge

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A balance sheet offset or foreign payables offset to fluctuations in foreign receipts attributable to exchange rate risk.

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free trade area

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A group of nations that have agreed to reduce tariffs and other trade barriers.

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value at risk

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The notional value of a transaction exposed to appreciation or depreciation because of ex-change rate risk.

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Maquiladora

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A foreign-owned assembly plant in Mexico that imports and assembles duty-free components for export and allows owners to pay duty only on the "value added."

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parallel imports

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which occur any time a foreign export product is purchased in one EU country for resale in another EU country.

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Mid Term managerial econ ch 1-5

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