DR. ABRAHAM C. CAMBA JR.

Department of Economics, San Beda College, Mendiola, Manila

and Polytechnic University of the Philippines, Sta. Mesa, Manila

Managerial Economics - ECO10

TUTORIAL SESSIONS

PART THREE

SESSION 1: FORECASTING USING TREND ANALYSIS (30 points).

Given the linear trend and log-linear trend for copper sales of Malanday
Mining Corp. (in thousands of tons) from the 1 st quarter of 2001 to the last
quarter of 2004.

Linear Trend Equation:

St = 364.66 + 6.475t
t-stat (1.96)

Adjusted R2 = 0.16

Log-linear Trend Equation:

LnSt = 5.89 + 0.016t

t-stat (2.07)

Adjusted R2 = 0.18

Note: USE NATURAL LOGARITHM (Ln function in your calculator)!

A) Forecast copper sales of Malanday Mining Corp. using the linear and
log-linear trend equations in each quarter of 2005.

B) Which form of the trend equation fits the historical data better?
 DR. ABRAHAM C. CAMBA JR.
Department of Economics, San Beda College, Mendiola, Manila

and Polytechnic University of the Philippines, Sta. Mesa, Manila

SESSION 2: FORECASTING USING REGRESSION ANALYSIS (20 points).

Office Enterprise (OE) produces a line of metal office file cabinets. The
company’s economist, having investigated a large number of past data, has
established the following equation of demand for these cabinets:

Q = 10,000 + 60B – 100P + 50C

where Q – annual number of cabinets sold

B – index of nonresidential construction

P – average price per cabinet charged by OE

C – average price per cabinet charged by OE’s closest competitor

It is expected that next year’s nonresidential construction index will stand at

160, OE’s average price will be Ph40, and the competitor’s average price will
be Ph35.

A. Forecast next year’s sales.

B. What will be the effect if the competitor lowers its price to

Ph32? If it raises its price to Ph36?

C. What will happen if OE reacts to the decrease mentioned in

part B by lowering its price to Ph37?

D. If the index forecast was wrong, and it turns out to be only

140 next year, what will be the effect on OE’s sales?

SESSION 3: CAPITAL BUDGETING (20 points).

 DR. ABRAHAM C. CAMBA JR.
Department of Economics, San Beda College, Mendiola, Manila

and Polytechnic University of the Philippines, Sta. Mesa, Manila

Two mutually exclusive alternatives, projects C and D, have the following

investments and cash flows:

Project Project
C D
Investment at period t Ph40,00 Ph40,00
=0 0 0
Cash inflow at t = 1 10,000 20,500
Cash inflow at t = 2 10,000 20,500
Cash inflow at t = 3 47,000 20,500

The company’s cost of capital is 12 percent.

A. Calculate the net present value and profitability index of each

project

B. Which of the two projects would you accept? Explain.

SESSION 4: PRICING PRACTICES – PRICE DISCRIMINATION (30 points).

Suppose the demand functions (and inverse demand functions) for three
market segments are

q1 = 1,000 – 100p1  p1 = 10 – (1/100)q1

q2 = 1,000 – 50p2  p2 = 20 – (1/50)q2
q3 = 1,000 – 20p3  p3 = 50 – (1/20)q3

and costs are, for output q, C(q) = 1,000 + 5q

 DR. ABRAHAM C. CAMBA JR.
Department of Economics, San Beda College, Mendiola, Manila

and Polytechnic University of the Philippines, Sta. Mesa, Manila

A. What are the profit-maximizing prices and outputs in the three

market segments, and hence the firm’s profits?

B. Suppose the monopolist is constrained to charge the same price in

these market segments. What is the profit-maximizing price and the
firm’s profit level in this case? Does total output change in moving
from price discrimination to uniform pricing?

Date of submission: September 16, 2009

References:

1. Economics for Managers (2008) by James R. McGuigan, R. Charles

Moyer, and Frederick H. deB. Harris.
2. Managerial Economics: Economic Tools for Today’s Decision Makers
(2006) by Paul G. Keat and Philip K.Y. Young.
3. Managerial Economics (2008) by Christopher Thomas and Maurice S.
Charles.