# Managerial Economics Study Set 8

## Quiz 5 :Business and Economic Forecasting

Question Type
Metropolitan Hospital has estimated its average monthly bed needs as N = 1,000 + 9X where X = time period ðmonthsÞ; January 2002 = 0 N = monthly bed nee Assume that no new hospital additions are expected in the area in the foreseeable future. The following monthly seasonal adjustment factors have been estimated, using data from the past five years: a. Forecast Metropolitan's bed demand for January, April, July, November, and December 2007. b. If the following actual and forecast values for June bed demands have been recorded, what seasonal adjustment factor would you recommend be used in making future June forecasts
Free
Essay

The estimated need of average monthly bed in Metropolitan Hospital is
Here,
is the time period in months (where January
, February
, March
, and so on) and
is the number of beds needed monthly.
a) The table below shows the calculation of unadjusted as well as adjusted forecast with the help of the estimate and adjustment factors.
b) The table below shows the calculation of change in actual values to the forecasted values.
Now, calculate the average of actual to the forecast ratio:
Thus, the seasonal adjustment factor for making future forecasts for June is
.

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Savings-Mart (a chain of discount department stores) sells patio and lawn furniture. Sales are seasonal, with higher sales during the spring and summer quarters and lower sales during the fall and winter quarters. The company developed the following quarterly sales forecasting model: t = 8.25 + 0.125t 2.75D1t + 0.25D2t + 3.50D3t where t = predicted sales ($million) in quarter t 8:25 = quarterly sales ($million) when t = 0 t = time period (quarter) where the fourth quarter of 2002 = 0, first quarter of 2003 = 1, second quarter of 2003 = 2,... Forecast Savings-Mart's sales of patio and lawn furniture for each quarter of 2010.
Free
Essay

The quarterly sales forecasting model patio and lawn furniture by Savings-Mart is:
Here,
are predicted sales (in million dollars) in quarter
, 8.25 is the quarterly sales (in million dollars) when
, and
is the time period (fourth quarter of
, first quarter of
, second quarter of
,)
The table below shows the sales forecast of Savings-Mart for each quarter of 2010.
Thus, the sales forecast of Savings-Mart for 2010 are
,
,
, and
for quarter 1, 2, 3, and 4, respectively.

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Plot the raw data on arrivals for each transportation mode against time, all on the same graph. Which mode is growing the fastest Which the slowest
Free
Essay

a) The table below shows the data on arrivals for each transportation mode against time.
To plot actual data points:
• Select cells C1 through F18.
• Select the "Insert" tab.
• Click "Line" in the "Chart" grouping.
Cruise ship arrivals are fastest growing mode and is clearly the source of growth for a business dependent on tourism.
Ferry arrivals, on the other hand, appear to be the slowest growing mode. It has actually shown a decline in between.

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Stowe Automotive is considering an offer from Indula to build a plant making automotive parts for use in that country. In preparation for a final decision, Stowe's economists have been hard at work constructing a basic econometric model for Indula to aid the company in predicting future levels of economic activity. Because of the cyclical nature of the automotive parts industry, forecasts of future economic activity are quite important in Stowe's decision process. Corporate profits (Pt 1) for all firms in Indula were about $100 billion. GDP for the nation is composed of consumption C, investment I, and government spending G. It is anticipated that Indula's federal, state, and local governments will spend in the range of$200 billion next year. On the basis of an analysis of recent economic activity in Indula, consumption expenditures are assumed to be $100 billion plus 80 percent of national income. National income is equal to GDP minus taxes T. Taxes are estimated to be at a rate of about 30 percent of GDP. Finally, corporate investments have historically equaled$30 billion plus 90 percent of last year's corporate profits (Pt 1). a. Construct a five-equation econometric model of the state of Indula. There will be a consumption equation, an investment equation, a tax receipt equation, an equation representing the GDP identity, and a national income equation. b. Assuming that all random disturbances average to zero, solve the system of equations to arrive at next year's forecast values for C, I, T, GDP, and Y.(Hint: It is easiest to start by solving the investment equation and then working through the appropriate substitutions in the other equations.)
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Forecasting in the Global Financial Crisis The causes and consequences of the global financial crisis (GFC) are numerous and remain hotly debated. 1 8 One catalyst was clearly the collapse of the U.S. housing market in 2007-2008. The Federal Reserve played a role by overstimulating the economy during 2004-2007 when the housing asset bubble was forming. Later the Fed tightened credit conditions throughout late 2007 and early 2008 even though the Banker's Roundtable reported that loan demand had "fallen off a cliff." Congress played a role in writing legislation that encouraged home ownership by those with no real prospect of repaying a mortgage loan. Subprime mortgage loans were even granted to borrowers with no income, no job, and no assets (so-called NINJA loans). Middle-income borrowers played a role by seeking mortgages for much larger houses than they could afford. Mortgage brokers earned fat commissions facilitating these transactions which bankers approved, while bank regulators looked the other way. In the end, the GFC was a massive failure of the capital markets that triggered what has been called the Great Contraction. U.S. GDP fell at magnitudes unseen since the -20 percent of the Great Depression of 1929-1932. In the last quarter of George W. Bush's presidency (2008Q4), real GDP fell by an astonishing -9 percent. Business confidence and private investment collapsed in 2007-2009 by -37 percent, whilst consumption declined by -2 percent. Cumulatively, four years of potential output growth approaching $1.7 trillion were lost, such that real GDP in the U.S. returned in 2011Q4 to$13.3 trillion for the first time since 2007Q4. What caused this cataclysmic event Was a lack of corporate governance or a failure of business integrity to blame In one sense, fraudulent conveyance underlies the global financial crisis. Mortgagebacked securities that combined prime and subprime mortgages (with subprime containing too little down payment and too much default risk) were packaged and sold as highly rated A-level debt securities. Even worse, the debt buyers then stripped out the bottom tranches, repackaged these riskiest mortgage loans, and sold them worldwide also as A-rated securities. Some would argue this constitutes a fraudulent conveyance, but at a minimum, such transactions violate market integrity, for which senior executives in the banks and brokerage houses were ultimately responsible. Market integrity is always defined relative to the expectations for fair and orderly markets of the market participants. In equity markets, for example, Aitken and Harris (2011) argue market participants expect regulators to prohibit market manipulation, insider trading, and front running conflicts of interest by broker-dealers serving as both principal and agent. 1 9 In debt markets, however, partial disclosure, rampant conflicts of interest, and some intentional manipulation and misrepresentation are expected by the market participants. Insiders regularly get on the phones and disclose unaudited financial information that is not publicly available in order to sharpen their bargaining position over a negotiated bond price. But these negotiations about the "haircut" warranted by the bond's perceived risks take place between sophisticated professionals with powerful reputation effects in repeat purchase bilateral agreements. The contrast between stock and bond markets could hardly be greater. In stock markets, retail buyers and sellers with access to no more nor any less publicly disclosed information meet anonymous sophisticated traders in highly regulated exchange transactions. These on-exchange trades are backed by settlement clearinghouses to mitigate the counterparty risk. Posted prices are available for immediate execution by broker-agents whose duties avoid egregious conflicts of interest. And the trading prices are informationally efficient in part because the dislocations of price attributable to market manipulation are surveilled, detected, and often prevented. So, what is fair and efficient in the equity markets reflect the higher integrity expectations of equity market participants. But just the opposite permeates the bond markets, and that is where the subprime mortgage problem arose. Highly experienced buyers of mortgage-backed securities knew that sellers were packaging mixed tranche securities with higher default rates than their A-minus ratings should convey. Normally less than 1 percent of prime mortgage borrowers default on their payments. Normally, subprime mortgage loans default in only 4 percent of all cases. As housing prices declined 27 percent nationwide in 2007-2009 and the typical house became worth only 73 percent of its 2007 purchase price, these default percentages became 3.5 percent for prime mortgages and 13 percent for subprime mortgages. It was cheaper to walk away from a house worth less than its 80 percent mortgage, allowing the bank to foreclose, rather than to continue to make payments and hope the housing market would improve. More foreclosures led to more distress sales, and more distress sales caused some states such as California and Florida and some municipalities such as Phoenix and Las Vegas to suffer -45 percent housing price declines. Consequently, as the GFC deepened, and the default rates worsened, everyone involved in mortgage-backed securities knew to apply deeper haircuts to the mixed tranche securities being fraudulently conveyed. The 7 percent haircut on mortgage-backed securities in November 2007 became 45 percent by November 2008. Still, that recognition did little to slow the destruction of household wealth associated with housing assets. And with negative wealth effects came a massive loss in both consumer and business confidence. The typical household became unwilling to buy consumer durables, not even a toaster, and the economy spiralled downward in something of a freefall. Could stronger corporate governance and greater business integrity have made any difference The answer to counterfactuals is always uncertain, but brainstorm about how events might have unfolded differently. Suppose more senior executives had refused to sign off on fraudulent conveyance of mis-rated bonds
Essay
Fred's Hardware and Hobby House expects its sales to increase at a constant rate of 8 percent per year over the next three years. Current sales are $100,000. Forecast sales for each of the next three years. b. If sales in 2003 were$60,000 and they grew to $100,000 by 2007 (a four-year period), what was the actual annual compound growth rate c. What are some of the hazards of employing a constant rate of growth forecasting model Essay Answer: Tags Choose question tag Estimate the double-log (log linear) time trend model for log cruise ship arrivals against log time. Estimate a linear time trend model of cruise ship arrivals against time. Calculate the root mean square error between the predicted and actual value of cruise ship arrivals. Is the root mean square error greater for the double log time trend model or for the linear time trend model SKAGWAY VISITOR ARRIVAL STATISTICS Data are available as an Excel file on the book's Web site. Source: The Skagway News, November 16, 1999. Essay Answer: Tags Choose question tag The Questor Corporation has experienced the following sales pattern over a 10-year period: a. Compute the equation of a trend line (similar to Equation) for these sales data to forecast sales for the next year. (Let 2004 = 0, 2005 = 1, etc., for the time variable.) What does this equation forecast for sales in the year 2014 b. Use a first-order exponential smoothing model with a w of 0.9 to forecast sales for the year 2014. Essay Answer: Tags Choose question tag Bell Greenhouses has estimated its monthly demand for potting soil to be the following: N = 400 + 4X Where N = monthly demand for bags of potting soil X = time periods in months (March 2006 = 0) Assume this trend factor is expected to remain stable in the foreseeable future. The following table contains the monthly seasonal adjustment factors, which have been estimated using actual sales data from the past five years: MONTH ADJUSTMENT FACTOR a. Forecast Bell Greenhouses' demand for potting soil in March, June, August, and December 2007. b. If the following table shows the forecasted and actual potting soil sales by Bell Greenhouses for April in five different years, determine the seasonal adjustment factor to be used in making an April 2008 forecast. Essay Answer: Tags Choose question tag Use the monthly series on the Consumer Price Index (all items) from the previous two years to produce a forecast of the CPI for each of the next three years. Is the precision of your forecast greater or less at 36 months ahead than at 12 months ahead Why Compare your answer to that of Moody's on-line U.S. Macro Model at http://www.economy.com/. Essay Answer: Tags Choose question tag A firm experienced the demand shown in the following table. *Unknown future value to be forecast. a. Fill in the table by preparing forecasts based on a five-year moving average, a three-year moving average, and exponential smoothing (with a w = 0.9 and a w = 0.3). Note: The exponential smoothing forecasts may be begun by assuming t+1 = Yt. b. Using the forecasts from 2005 through 2009, compare the accuracy of each of the forecasting methods based on the RMSE criterion. c. Which forecast would you have used for 2010 Why Essay Answer: Tags Choose question tag The forecasting staff for the Prizer Corporation has developed a model to predict sales of its air-cushioned-ride snowmobiles. The model specifies that sales S vary jointly with disposable personal income Y and the population between ages 15 and 40, Z, and inversely with the price of the snowmobiles P. Based on past data, the best estimate of this relationship is where k has been estimated (with past data) to equal 100. a. If Y =$11,000, Z = $1,200, and P =$20,000, what value would you predict for S b. What happens if P is reduced to $17,500 c. How would you go about developing a value for k d. What are the potential weaknesses of this model Essay Answer: Tags Choose question tag Now create an index number to represent the growth of arrivals in each transportation mode by dividing the first (smallest) number in each column into the remaining numbers in the column. Plot these index numbers for each transportation mode against time, all in the same graph. Which is growing the fastest Essay Answer: Tags Choose question tag Forecasting in the Global Financial Crisis The causes and consequences of the global financial crisis (GFC) are numerous and remain hotly debated. 1 8 One catalyst was clearly the collapse of the U.S. housing market in 2007-2008. The Federal Reserve played a role by overstimulating the economy during 2004-2007 when the housing asset bubble was forming. Later the Fed tightened credit conditions throughout late 2007 and early 2008 even though the Banker's Roundtable reported that loan demand had "fallen off a cliff." Congress played a role in writing legislation that encouraged home ownership by those with no real prospect of repaying a mortgage loan. Subprime mortgage loans were even granted to borrowers with no income, no job, and no assets (so-called NINJA loans). Middle-income borrowers played a role by seeking mortgages for much larger houses than they could afford. Mortgage brokers earned fat commissions facilitating these transactions which bankers approved, while bank regulators looked the other way. In the end, the GFC was a massive failure of the capital markets that triggered what has been called the Great Contraction. U.S. GDP fell at magnitudes unseen since the -20 percent of the Great Depression of 1929-1932. In the last quarter of George W. Bush's presidency (2008Q4), real GDP fell by an astonishing -9 percent. Business confidence and private investment collapsed in 2007-2009 by -37 percent, whilst consumption declined by -2 percent. Cumulatively, four years of potential output growth approaching$1.7 trillion were lost, such that real GDP in the U.S. returned in 2011Q4 to $13.3 trillion for the first time since 2007Q4. What caused this cataclysmic event Was a lack of corporate governance or a failure of business integrity to blame In one sense, fraudulent conveyance underlies the global financial crisis. Mortgagebacked securities that combined prime and subprime mortgages (with subprime containing too little down payment and too much default risk) were packaged and sold as highly rated A-level debt securities. Even worse, the debt buyers then stripped out the bottom tranches, repackaged these riskiest mortgage loans, and sold them worldwide also as A-rated securities. Some would argue this constitutes a fraudulent conveyance, but at a minimum, such transactions violate market integrity, for which senior executives in the banks and brokerage houses were ultimately responsible. Market integrity is always defined relative to the expectations for fair and orderly markets of the market participants. In equity markets, for example, Aitken and Harris (2011) argue market participants expect regulators to prohibit market manipulation, insider trading, and front running conflicts of interest by broker-dealers serving as both principal and agent. 1 9 In debt markets, however, partial disclosure, rampant conflicts of interest, and some intentional manipulation and misrepresentation are expected by the market participants. Insiders regularly get on the phones and disclose unaudited financial information that is not publicly available in order to sharpen their bargaining position over a negotiated bond price. But these negotiations about the "haircut" warranted by the bond's perceived risks take place between sophisticated professionals with powerful reputation effects in repeat purchase bilateral agreements. The contrast between stock and bond markets could hardly be greater. In stock markets, retail buyers and sellers with access to no more nor any less publicly disclosed information meet anonymous sophisticated traders in highly regulated exchange transactions. These on-exchange trades are backed by settlement clearinghouses to mitigate the counterparty risk. Posted prices are available for immediate execution by broker-agents whose duties avoid egregious conflicts of interest. And the trading prices are informationally efficient in part because the dislocations of price attributable to market manipulation are surveilled, detected, and often prevented. So, what is fair and efficient in the equity markets reflect the higher integrity expectations of equity market participants. But just the opposite permeates the bond markets, and that is where the subprime mortgage problem arose. Highly experienced buyers of mortgage-backed securities knew that sellers were packaging mixed tranche securities with higher default rates than their A-minus ratings should convey. Normally less than 1 percent of prime mortgage borrowers default on their payments. Normally, subprime mortgage loans default in only 4 percent of all cases. As housing prices declined 27 percent nationwide in 2007-2009 and the typical house became worth only 73 percent of its 2007 purchase price, these default percentages became 3.5 percent for prime mortgages and 13 percent for subprime mortgages. It was cheaper to walk away from a house worth less than its 80 percent mortgage, allowing the bank to foreclose, rather than to continue to make payments and hope the housing market would improve. More foreclosures led to more distress sales, and more distress sales caused some states such as California and Florida and some municipalities such as Phoenix and Las Vegas to suffer -45 percent housing price declines. Consequently, as the GFC deepened, and the default rates worsened, everyone involved in mortgage-backed securities knew to apply deeper haircuts to the mixed tranche securities being fraudulently conveyed. The 7 percent haircut on mortgage-backed securities in November 2007 became 45 percent by November 2008. Still, that recognition did little to slow the destruction of household wealth associated with housing assets. And with negative wealth effects came a massive loss in both consumer and business confidence. The typical household became unwilling to buy consumer durables, not even a toaster, and the economy spiralled downward in something of a freefall. Suppose senior risk managers had asked who would be the counterparties that would need to step forward to buy mortgage-backed securities when it became clear their default rates were grossly underestimated. All markets, especially financial markets, do clear with enough price adjustment. But suppose senior executives in the banks had pressed for straight answers to just how much of a haircut such fraudulently conveyed securities would require. Is it possible at least some of what has transpired could have been avoided Not Answered There is no answer for this question Tags Choose question tag Lumber Price Forecast One of the most important variables that must be forecasted accurately to project the cost of single-family home construction is the price of Southern pine framing lumber. Use the following data to forecast two- and four-year-ahead lumber prices. Compare the forecast accuracy of at least two alternative forecasting methods. Lumber Price Index Data are available as an Excel file on the book's Web site. Essay Answer: Tags Choose question tag Forecasting in the Global Financial Crisis The causes and consequences of the global financial crisis (GFC) are numerous and remain hotly debated. 1 8 One catalyst was clearly the collapse of the U.S. housing market in 2007-2008. The Federal Reserve played a role by overstimulating the economy during 2004-2007 when the housing asset bubble was forming. Later the Fed tightened credit conditions throughout late 2007 and early 2008 even though the Banker's Roundtable reported that loan demand had "fallen off a cliff." Congress played a role in writing legislation that encouraged home ownership by those with no real prospect of repaying a mortgage loan. Subprime mortgage loans were even granted to borrowers with no income, no job, and no assets (so-called NINJA loans). Middle-income borrowers played a role by seeking mortgages for much larger houses than they could afford. Mortgage brokers earned fat commissions facilitating these transactions which bankers approved, while bank regulators looked the other way. In the end, the GFC was a massive failure of the capital markets that triggered what has been called the Great Contraction. U.S. GDP fell at magnitudes unseen since the -20 percent of the Great Depression of 1929-1932. In the last quarter of George W. Bush's presidency (2008Q4), real GDP fell by an astonishing -9 percent. Business confidence and private investment collapsed in 2007-2009 by -37 percent, whilst consumption declined by -2 percent. Cumulatively, four years of potential output growth approaching$1.7 trillion were lost, such that real GDP in the U.S. returned in 2011Q4 to $13.3 trillion for the first time since 2007Q4. What caused this cataclysmic event Was a lack of corporate governance or a failure of business integrity to blame In one sense, fraudulent conveyance underlies the global financial crisis. Mortgagebacked securities that combined prime and subprime mortgages (with subprime containing too little down payment and too much default risk) were packaged and sold as highly rated A-level debt securities. Even worse, the debt buyers then stripped out the bottom tranches, repackaged these riskiest mortgage loans, and sold them worldwide also as A-rated securities. Some would argue this constitutes a fraudulent conveyance, but at a minimum, such transactions violate market integrity, for which senior executives in the banks and brokerage houses were ultimately responsible. Market integrity is always defined relative to the expectations for fair and orderly markets of the market participants. In equity markets, for example, Aitken and Harris (2011) argue market participants expect regulators to prohibit market manipulation, insider trading, and front running conflicts of interest by broker-dealers serving as both principal and agent. 1 9 In debt markets, however, partial disclosure, rampant conflicts of interest, and some intentional manipulation and misrepresentation are expected by the market participants. Insiders regularly get on the phones and disclose unaudited financial information that is not publicly available in order to sharpen their bargaining position over a negotiated bond price. But these negotiations about the "haircut" warranted by the bond's perceived risks take place between sophisticated professionals with powerful reputation effects in repeat purchase bilateral agreements. The contrast between stock and bond markets could hardly be greater. In stock markets, retail buyers and sellers with access to no more nor any less publicly disclosed information meet anonymous sophisticated traders in highly regulated exchange transactions. These on-exchange trades are backed by settlement clearinghouses to mitigate the counterparty risk. Posted prices are available for immediate execution by broker-agents whose duties avoid egregious conflicts of interest. And the trading prices are informationally efficient in part because the dislocations of price attributable to market manipulation are surveilled, detected, and often prevented. So, what is fair and efficient in the equity markets reflect the higher integrity expectations of equity market participants. But just the opposite permeates the bond markets, and that is where the subprime mortgage problem arose. Highly experienced buyers of mortgage-backed securities knew that sellers were packaging mixed tranche securities with higher default rates than their A-minus ratings should convey. Normally less than 1 percent of prime mortgage borrowers default on their payments. Normally, subprime mortgage loans default in only 4 percent of all cases. As housing prices declined 27 percent nationwide in 2007-2009 and the typical house became worth only 73 percent of its 2007 purchase price, these default percentages became 3.5 percent for prime mortgages and 13 percent for subprime mortgages. It was cheaper to walk away from a house worth less than its 80 percent mortgage, allowing the bank to foreclose, rather than to continue to make payments and hope the housing market would improve. More foreclosures led to more distress sales, and more distress sales caused some states such as California and Florida and some municipalities such as Phoenix and Las Vegas to suffer -45 percent housing price declines. Consequently, as the GFC deepened, and the default rates worsened, everyone involved in mortgage-backed securities knew to apply deeper haircuts to the mixed tranche securities being fraudulently conveyed. The 7 percent haircut on mortgage-backed securities in November 2007 became 45 percent by November 2008. Still, that recognition did little to slow the destruction of household wealth associated with housing assets. And with negative wealth effects came a massive loss in both consumer and business confidence. The typical household became unwilling to buy consumer durables, not even a toaster, and the economy spiralled downward in something of a freefall. Suppose more monitoring by corporate-level officers had prevented field-agent mortgage brokers from filing mortgage applications that were clearly fraudulent Not Answered There is no answer for this question Tags Choose question tag In attempting to formulate a model of the passenger arrival data on cruise ships over time, would a nonlinear (perhaps a multiplicative exponential) model be preferable to a linear model of cruise ship arrivals against time What about in the case of the passenger arrivals by ferry against time Essay Answer: Tags Choose question tag Cruise Ship Arrivals in Alaska The summer months bring warm weather, mega fauna (bears), and tourists to the coastal towns of Alaska. Skagway at the top of the Inland Passage was, in the nineteenth century, the entrance to the Yukon. Today this town attracts multiple cruise ships per day; literally thousands of passengers disembark into a town of 800 for a taste of the Alaskan frontier experience between 10 A.M. and 5 P.M. Some ride steam trains into the mountains while others wander the town spending money in galleries, restaurants, and souvenir shops. The Skagway Chamber of Commerce is trying to decide which transportation mode in the table of visitor arrival statistics should receive the highest priority in the tourist promotions for next season. Plot the logarithm of arrivals for each transportation mode against time, all on the same graph. Which now appears to be growing the fastest Essay Answer: Tags Choose question tag The economic analysis division of Mapco Enterprises has estimated the demand function for its line of weed trimmers as QD = 18,000 + 0.4N 350PM + 90PS Where N = number of new homes completed in the primary market area PM = price of the Mapco trimmer PS = price of its competitor's Surefire trimmer In 2010, 15,000 new homes are expected to be completed in the primary market area. Mapco plans to charge$50 for its trimmer. The Surefire trimmer is expected to sell for $55. a. What sales are forecast for 2010 under these conditions b. If its competitor cuts the price of the Surefire trimmer to$50, what effect will this have on Mapco's sales c. What effect would a 30 percent reduction in the number of new homes completed have on Mapco's sales (ignore the impact of the price cut of the Surefire trimmer)