Morehead State University ECON 661, Homework Assignment 2 SP 2017


ECON 661, Managerial Economics

Homework Assignment 2


Please answer all questions.

1. A farmer must decide whether to add fertilizer when planting corn. He estimates that the corn revenue yield will be about $75 per acre without fertilizer and about $100 per acre using fertilizer. If the cost of fertilizer is $20 per acre, what should the farmer do – Fertilize or not fertilize? Justify your answer. (5 pts)

2. Carpenter Smith owns a company that installs wood floors. He is offered $20,000 to install a new floor. The cost of his labor and other operating expenses (excluding the wood) adds up to $15,000. He has wood for the job in inventory. It originally cost him $2,000. Price increases have raised the market value of the wood to $6000, and this value is not expected to change in the near future. Should he accept the offer? Justify your answer. (5 pts)

3. You work for an airline company as a ticket operations manager at an airport. Your unit is responsible for issuing boarding passes to customers every day. Currently you employ customer service representatives (CSR) and electronic ticketing machines (ETM) to meet the demands of customers. Each CSR is paid wages and fringe benefits of $150/day. It also costs you$50a day to lease each machine (price includes installation, software support, and servicing). The table below contains the contributions of CSRs and ETMs in terms of the number of customers served.



Number of Workers

Number Customers Served

Number of Machines

Number of Customers Served





























If you have a total budget of $900 per day, how should you allocate this budget (i.e., what is the number of CSRs and ETMs you should hire) in order to maximize number of customers served? Apply marginal analysis when answering this question (15 pts).

4. The CEO of a hospital conducted performance review of all the hospitals departments, including the obstetrics area. As part of this review process, the chief of obstetrics proposed increasing the number of babies being delivered by the department. The CEO examined the department’s financial statements from a recent month and noted that for 540 deliveries, costs totaled $3,132,000, while revenue totaled $2,754,000. Pointing out that the hospital was losing $700 per patient, the CEO asked why anyone would want to increase a service that was losing $700 every time the hospital delivered another baby. The chief of obstetrics, however, argued that the CEO’s analysis was mistaken and that the department was actually generating over $3,000 per delivery, thus, increasing the number of deliveries would lead to an increase in hospital profit. (5 pts)

a. Do you agree with the chief of obstetrics that the CEO analysis was mistaken? Why? Or Why not?

b. What could be the basis (calculations) that made the chief of obstetrics to claim that the department was actually generating over $3,000 per delivery.

3. An ice cream store sells ice creams of two different flavors – chocolate and strawberry. The table below shows the quantity (QD) in in half-gallons of chocolate ice cream sold, the price P of the chocolate ice cream, and the price of the other flavor, strawberry, PS over the past 03 weeks.

b. Complete the regression analysis by filling in the blank spaces in each the following statement. (5 points each)

i. The equation of the sample regression line is:

ii. There are _____ degrees of freedom for the t-test. At the 5% level of significance, the critical t-value for the test is ______.

iii. At the 5% level of significance, the parameter __ is significant, the parameter ____ is significant, and the parameter _______ is not significant.

iv. At the 2% level of significance, the critical t-value for a t-test is ___. At the 2% level of significance, a is significant, b is significant, and c is not significant.

v. The p-value for b indicates that the exact level of significance is 0.7% percent, which is the probability of ____ error.

vi. At the 5% level of significance, the critical value of the F-statistic is ___ The model as a whole is significant at the 5% level.

vi. If Ps equals $8, while P equals $03, the fitted (or predicted) value of QD is _____.

vii. The percentage of the total variation in QD that is NOT explained by the regression is ___________%

c. Suppose you think that the demand for the chocolate ice cream is related to its price and the price of the strawberry ice cream in the following nonlinear way:

i. Using the data in the table, estimate the log-linear demand equation for the store’s chocolate ice cream.

ii. Write the estimated log-linear model (5 points)

iii. Provide a complete analysis (report) of your regression results. Note: Presenting a correct and complete description and interpretation of regression estimation results is equally as important as actually doing the estimation.

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