Quantitative Techniques

& Economics
Mark Benedict Guia
Reviewer
CRC-ACE The Professional CPA Review School
QUANTITATIVE TECHNIQUES
 Quantitative Techniques
• Also called Management Science
• Discipline devoted to studying and developing
procedures to help the process of making
decision and uses the scientific method for
decision making.
 Linear Programming
• It made use of certain mathematical
techniques to get the best possible solution
(maximum profit or minimum costs) to a
problem involving limited resources
• Ways to solve the problem
– Graphical Method
– Simplex Method
 Parts of a Linear Program
• Objective
– Maximize Profit
– Minimize Cost
• Constraint
– Maximum Allowed ≤
– Minimum Required ≥
 Problem 1
A furniture company produces tables and chairs and can
sell all it can produce. Each table contributes P230 to
profit of the firm, and each chair contributes P125.
Production of each table requires 100 minutes in the
company’s assembly center and 200 minutes in the
company’s finishing center. Production of each chair
requires 140 minutes in the assembly and 120 minutes
in the finishing center. The company’s assembly center
is available only for 2,000 minutes a day and its
finishing center is available only for 1,680 minutes a
day.
Required: Construct the linear programming objective
and constraints.
 Solution
Tables Chairs
Profit 230 125
Assembly (2,000) 100 140
Finishing (1,680) 200 120
 Answer:
Max. P = 230T + 125C
s.t. A: 100T + 140C ≤ 2,000
F: 200T + 120C ≤ 1,680
 Problem 2 (Linear Programming)
A small generator burns two types of fuel: Low sulfur
and high sulfur to produce electricity. For one hour,
each gallon of low sulfur emits 2 units of sulfur dioxide,
generates 4 kilowatts electricity and costs P160. Each
gallon of high sulfur emits 5 units of sulfur dioxide,
generates 4 kilowatts and costs P150. The
environmental protection agency insists that the
maximum amount of sulfur dioxide that can be emitted
per hour is 15 units. Suppose that at least 16 kilowatts
must be generated per hour.
Required: Construct the linear programming objective
and constraints.
 Solution
L H
Cost 160 150
Sulfur Dioxide (15) 2 5
Kilowatts (16) 4 4
 Answer:
Min. C : 160L + 150H
s.t. SD: 2L + 5H ≤ 15
KW: 4L + 4H ≥ 16
 Decision Theory
• Decision Alternatives (Choices)
• State of Nature (Possible Outcome or
Situation)
• Decision Criteria
– @ Certainty: EV = P(V)
– @ Uncertainty: Maximax, Maximin, Minimax
Regret
– @ Risks: Expected Pay-off Criterion, Expected
Opportunity Loss Criterion
 Problem 3: Expected Value
• A man buying a raffle ticket can win a first
prize of P15,000 or a second prize of P12,000
with probabilities of .002% and .0015%,
respectively.
• Required: Determine the fair price to pay for
the ticket. (The fair price is equivalent to the
EV)
 Solution:
Cash x Probability
15,000 x .00002 = .30
12,000 x .000015 = .18
Expected Value .48
 Problem 4: Expected Value
Pio and Sons Incorporated spends P30,000 to
prepare a bid on a construction project. If the
contract is awarded, the estimated revenue
will be P300,000. If the contract is not
awarded, the company has a penalty of
P40,000. There is a 40% chance that the
company will be awarded the contract.
Required: Determine the expected value.
 Solution:
Cash x Probability
300,000 x .40 120,000
(40,000) x .60 (24,000)
(30,000) x 1 = (30,000)
Expected Value 66,000
 Problem 5 (Decision Under
Uncertainty and Risks)
• Rex Computers is in the stage of determining the size of computer system
to be used in its computer shops. The pay-off table with the corresponding
decision alternative and state of nature follows:
Low Consumer Moderate High Consumer
Acceptance Consumer Acceptance
Acceptance
Put up a small
500,000 700,000 1,200,000
system
Put up a medium-
300,000 1,000,000 1,600,000
sized system
Put up a large
(200,000) (50,000) 2,500,000
system

Rex Computers’ management believes that there is a 20% chance that

consumer acceptance of their computer services will be low; a 50%
chance that it will be moderate, and a 30% chance it will be high.
 Problem 5 (Decision Under
Uncertainty and Risks)
Required:
1. Show the decision recommendation under each
of the following criteria:
a. Maximax
b. Maximin
c. Minimax Regret
2. What is the decision recommended under the
expected payoff criterion? Under the expected
opportunity loss criterion?
3. What is the expected value of perfect
information?
 Solution: (Regret Table)

Low Consumer Moderate High Consumer

Acceptance Consumer Acceptance
Acceptance
Put up a small
0 300,000 1,300,000
system
Put up a medium-
200,000 0 900,000
sized system
Put up a large
700,000 1,050,000 0
system
 Solution: Expected Pay-off
• Put up a small system
– 500,000 (.2) + 700,000 (.5) + 1,200,000 (.3)
– 810,000
• Put up a medium-sized system
– 300,000 (.2) + 1,000,000 (.5) + 1,600,000 (.3)
– 1,040,000
• Put up a large system
– (200,000) (.2) + (50,000) (.5) + 2,500,000 (.3)
– 685,000
 Solution: Expected Opportunity Loss
• Put up a small system
– 0 (.2) + 300,000 (.5) + 1,300,000 (.3)
– 540,000
• Put up a medium-sized system
– 200,000 (.2) + 0 (.5) + 900,000 (.3)
– 310,000
• Put up a large system
– 700,000 (.2) + 1,050,000 (.5) + 0 (.3)
– 665,000
 Problem 6
A dealer in luxury yachts may order 1, 2 or 3 yachts for this season’s
inventory but no more or less. There is P50,000 cost of carrying
each excess yacht and a P200,000 gain for each yacht sold.
Required:
1. Construct the decision pay-off table.
2. Show the decision recommendation under each of the following
criteria:
a. Maximax
b. Maximin
c. Minimax Regret
3. What is the decision recommended under the expected payoff
criterion if management estimates that there is a 20% probability
that it will be able to sell 1 yacht, 50% probability of selling 2 yacht
and a 30% probability that 3 yacht will be sold? Under the
expected opportunity loss criterion?
4. What is the expected value of perfect information?
 Solution: Pay-Off Table

To be Sold
1 2 3
1 200,000 200,000 200,000
To Be 2 150,000 400,000 400,000
Purchased
3 100,000 350,000 600,000
 Solution: Regret Table

To be Sold
1 2 3
1 0 200,000 400,000
To Be 2 50,000 0 200,000
Purchased
3 100,000 50,000 0
 Solution: Expected Pay-off
• Purchase 1
– 200,000 (.2) + 200,000 (.5) + 200,000 (.3)
– 200,000
• Purchase 2
– 150,000 (.2) + 400,000 (.5) + 400,000 (.3)
– 350,000
• Purchase 3
– 100,000 (.2) + 350,000 (.5) + 600,000 (.3)
– 375,000
 Solution: Expected Opportunity Loss
• Purchase 1
– 0 (.2) + 200,000 (.5) + 400,000 (.3)
– 220,000
• Purchase 2
– 50,000 (.2) + 0 (.5) + 200,000 (.3)
– 70,000
• Purchase 3
– 100,000 (.2) + 50,000 (.5) + 0 (.3)
– 45,000
 Learning Curve
• This theory stipulates that every time the
cumulative quantity of units produced is
doubled, the cumulative average time per unit
is reduced by a given percentage.
 Problem 7:
A particular manufacturing job is subjected to an
estimated 75% learning curve. The first unit
required 50 labor hours to complete.
Required:
1. What is the cumulative average time per unit
after four units are completed?
2. What is the total time required to produce 2
units?
3. How many hours are required to produce the
second unit?
 Solution
Units Ave. Cumulative Total Time
Time Per unit
1 50 50
2 37.5 75
4 28.125 112.50
8 21.09 168.72
 Problem 8
Bulacan Corporation plans to begin
production of a new product on July 1, 2013.
An 80% learning curve is applicable to
Bulacan’s manufacturing operations.
Required: If it is expected to take 1,000 direct
labor hours to produce the first unit, how
many direct labor hours should it take to
produce a total of eight units?
 Solution
Units Ave. Cumulative Total Time
Time Per unit
1 1,000 1,000
2 800 1,600
4 640 2,560
8 512 4,096
 Forecasting
• It is telling in advance a possible event that may
take place in the future
• Types of Forecasting
– Time Series
• Unweighted Moving Average
• Weighted Moving Average
• Exponential Smooting
– Judgmental
• Delphi Method
• Sales force Composite
• Customer Expectation
 Problem 9
• Suppose that the San Beda College of Manila had the following record of its
growth from 2013-2016

Year Enrolment
2013 3,000
2014 5,800
2015 6,000
2016 7,000
Required:
1. Forecast the 2016 and 2017 enrolment using 3 year moving average forecast.
2. Use a 3-year weighted moving average forecasts the enrollment in 2016 and
2017.
3. Forecast the 2017 enrolment using exponential smoothing forecast if alpha is .6
and previous forecast for 2016 is 5,500.
 Solution
• Unweighted Moving Average
– 2016 3,000 + 5,800 + 6,000
3
– 2017 5,800 + 6,000 + 7,000
3
• Weighted Moving Average
– 2016 3,000 (1/6) + 5,800 (2/6) + 6,000 (3/6)
– 2017 5,800 (1/6) + 6,000 (2/6) + 7,000 (3/6)
• Exponential Smoothing
– 2017 7,000 (.6) + 5,500 (.4)
 Problem 10
The data below consist of the closing price of the common stock of the
American Telephone and Telegraph Corporation on 10 recent trading days.
Time(t) Price Time(t) Price
1 P 24.10 6 P 22.73
2 23.80 7 22.60
3 23.39 8 21.76
4 22.90 9 22.14
5 22.10 10 21.69
Required:
1. Using a three-period moving average (unweighted), forecast the price of
the stock for Period 10.
2. Using a five-period moving average (weighted), forecast the price of the
stock for period 10.
3. Using an alpha of .10, forecast the price of the stock for period 11
assuming that the forecasted price for period 10 was P20.50.
 Solution
• Unweighted Moving Average
– Period 10 22.14 + 21.76 + 22.60
3
• Weighted Moving Average
– P. 10 22.14 (5/15) + 21.76 (4/15) + 22.60 (3/15)
+ 22.73 (2/15) + 22.10 (1/15)
• Exponential Smoothing
– 2017 21.69 (.1) + 20.50 (.9)
 Program Evaluation and Review
Technique (PERT) & Critical Path
Method (CPM)
• Determining the Expected Time
Mean (expected time): te = tp + 4 tm + to
6
• Draw the network.
• Analyze the paths through the network
– Forward Pass (Earliest Start and Earliest Finish)
– Backward Pass (Latest Start and Latest Finish)
• Find the critical path.
 Problem 11
Consider the following activities and estimated
time:
Activity Immediate Optimistic Most Pessimistic
Predecessor Time Likely Time
A - 4 6 8
B - 1 4.5 5
C A 3 3 3
D A 4 5 6
E A 0.5 1 1.5
F B,C 3 4 5
G B,C 1 1.5 5
H E,F 5 6 7
I E,F 2 5 8
J D,H 2.5 2.75 4.5
K G,I 3 5 7
 Solution
Activity Expected
Time
A 6
B 4
C 3
D 5
E 1
F 4
G 2
H 6
I 5
J 3
K 5
 Problem 12
The optimistic, most probable, and pessimistic
times (in days) for completion of activities for
a certain project are as follows:
MOST
ACTIVIT IMMEDIATE OPTIMISTIC PESSIMISTIC
PROBABLE
Y PREDECESSOR TIME (o) TIME
TIME (m)
A - 4 5 6
B - 6 8 10
C A 6 6 6
D B 3 4 5
E B 2 3 4
F C,D 8 10 12
G E 6 7 8
H C,D 12 13 20
I F,G 10 12 14
 Solution
Activity Expected
Time
A 5
B 8
C 6
D 4
E 3
F 10
G 7
H 14
I 12
ECONOMICS
 Economics
A social science that aims
to study how the society
allocates its scarce (limited)
resources to satisfy the
society’s unlimited needs
and wants in the most
efficient way.
The Economic Problem
CHOICE = OPPORTUNITY COST
Economic System
 Branches of Economics
MICROECONOMICS
• Individuals
• Consumer Theory =
Demand
• Production Theory = Supply
• Market Structures
• Existence of Externalities
MACROECONOMICS
• Entire economic system
• Economic Issues: Inflation,
Unemployment, Economic
Growth and Balance of
Payment
– Monetary Policy = Money and
Banking
– Government and Fiscal Policy =
Public Finance
• National Income = Economic
Trade Models
• International Trade = Theory
and Exchange Rates
MICROECONOMICS
 Definition
• How an individual consumer spends his income
to maximize satisfaction
• How a business firm combines resources or
factors of production to maximize profits and
minimize losses
• How the price of each commodity and each type
of resource is determined by demand and supply.
• How individual decisions are affected by different
forms of market organization
 Law of Demand
• As the prices of commodity decreases, all
other things being constant, the quantity of
the product that buyers are willing and able to
buy increases. (Inverse relationship with price)
• Buyers’ response will be greater after they
have had time to adjust more fully to a price
change
Principles behind Consumer Choice
• There is always a limited income, while
unlimited desires necessitates choice
• Consumers make good choices to achieve
their purposes
• Consumers can substitute between like goods
and services
• Consumers make decisions based on
imperfect information
• Law of Diminishing Utility
 Determinants of Demand
• Price (Primary determinant)
• Non-Price Determinants
– Income
– Population
– Taste and Preference
– Price Expectation
– Price of related goods
– Substitution Effect
Change in Demand
• Movement along the demand
curve = change in price of
goods and services
• Shift of the demand curve =
Change in income, preference,
or prices of other goods
and/or services
 Problem 1
1. The effect of the decrease in the price of frozen yogurt to ice
creams.
2. The effect of the increase in the price of sugar to coffee.
3. Hidilin Diaz winning the silver medals to gyms.
4. The aging of baby boomers to the sale of corduroy pants.
5. The news of increasing price of fuel in the world market.
6. Increase in the price of Tide.
7. The effect of the increase in the price of bread to sandwich
spread
8. Receipt of mid-year bonus to the sale of rice
9. The effect of promotion of people to higher position to fine
dining restaurants
10. The effect of increase in unemployment to the sale of yacht
 Types of Demand Elasticity
• Elastic Demand
• Inelastic Demand
• Unitary Elastic
Demand
• Perfectly Elastic
Demand (Purely
competitive market)
• Perfectly Inelastic
Demand (Medicines
without no
Substitute)
Determinants of Demand Elasticity
• Number of Substitute Goods
• Price Increase in proportionate to income
• Importance of the product to the buyers
(Luxury goods versus Essential Goods)
 Price Elasticity of Demand

Change in Quantity Demanded

Average Quantity Demanded
Elasticity =
Change in Price
Average Price
 Problem 2
Product Price Quantity
2015 2016 2015 2016
A 10 8 30 50
B 12 6 40 50
C 15 15 20 30
D 12 18 50 50
E 10 11 50 55
Income Elasticity of Demand

Change in Quantity Demanded

Income Average Quantity Demanded
Elasticity of
Demand Change in Income
Average Income
 Cross Elasticity of Demand

Change in Quantity of Y Demanded

Cross Average Quantity of Y Demanded
Elasticity of
Demand Change in Price of X
Average Price of X
Determinants of Supply
• Price (Primary
determinant) – direct
relationship
• Non-Price Determinants
– Technology
– Cost of Production
– Number of Sellers or
Producers
– Prices of Other goods
– Price Expectations
– Taxes and Subsidies
 Change in Supply
• Movement along the supply curve - change in
price of a good or service
• Shift of the supply curve – change in costs, input
prices, technology, or prices of related goods and
services
 Type of Supply Elasticity
• Elastic Supply
• Inelastic Supply
• Unitary Supply
• Perfectly Elastic Supply
• Perfectly Inelastic Supply
 Price Elasticity of Supply

Change in Quantity Supplied

Average Quantity Supplied
Elasticity =
Change in Price
Average Price
 Demand, Supply and Market
Equilibrium
• Quantity Demanded < Quantity Supplied =
Surplus
• Quantity Demand = Quantity Supplied =
Equilibrium
• Quantity Demand > Quantity Supplied =
Shortage
 Problem 4:
Price Quantity Quantity
Demanded Supplied
10 100 800
8 200 600
6 350 350
4 550 200
2 800 50
Required:
1. The equilibrium price? Equilibrium Quantity?
2. At a legal price of P4, how many units will the
shortage of the product be?
3. At a legal price of P8, how many units will the surplus
of the product be?
 Theory of Consumer Behavior
• Utility
• Marginal Utility
• Law of Diminishing Marginal Utility
 Factors of Production
• Land (sometimes called natural resources)
• Labor
• Capital (Product of the past industry of man, a
wealth, and to be used to produce more value)
– Explicit Costs
– Implicit Costs
– Economic Profit
– Accounting Profit
• Entrepreneurship
 Economies of Scale
• Reduction in the firm’s per unit costs as all
factors of production are increased in an
optimal way.
• Causes of Economies of Scale
– Labor specialization
– Managerial specialization
– More efficient capital
– Ability to profitably use by-products
Market Structures
MACROECONOMICS
 Definition
• A branch of learning that specializes on the
study of economic activities on the aggregate
level.
• A study of the behavior of the economy as a
whole.
• Its main concern are total output, total
income, general level of employment
(unemployment rate) and general price level
(inflation)
General Concerns of Macroeconomics
• Low inflation
– Demand - pull inflation
– Cost - push inflation
• Low unemployment
• Economic growth
• Balance of payments equilibrium
Four Sectors of Economy
Components of Aggregate Demand
• Private Consumption
• Private Investment
• Government Expenditures
• Net Export (export minus import)
 Factors Affecting the General Level of
Demand
• Fiscal (Taxes and Spending) and Monetary
(Financial System) Policies of the Government
• Changes in Asset Values (Real and Financial
Assets)
• Economic performance of trading partners
abroad
• Oil Price Changes
Determinants of Aggregate Supply
• Changes in the cost of production
• Changes in taxes and subsidies
• Increase in demand of local products abroad
 National Output
• Gross Domestic Product (GDP)
• Gross National Product (GNP)
• Net National Product (NNP)
• National Income (NI)
• Personal Income (PINc)
• Disposable Income (DI)
• Personal Savings (PS)
 Problem 5:
The financial transactions of the Republic of
Congo with values stated in billions of local
currency follows:
Private Consumption P 2,000
Private Investment 3,000
Government Expenditure 1,500
Total Value of Export 1,500
Total Value of Import 1,000
Transfer Payments 1,000
Corporate Income Taxes 100
Social Security Contributions 400
Indirect Business Taxes 420
Personal Taxes 500
Undistributed Corporate Profits 50
Depreciation 1,000
Net Income earned abroad for the country 500
 Required: Compute the following:
1. Gross Domestic Product (GDP) = PC + PI + GE +
(X – M)
2. Gross National Product (GNP) = PC + PI + GE + (X
– M) + RA
3. Net National Product (NNP) = GNP – TDE
4. National Income (NI) = NNP – VAT
5. Personal Income (PINc)= NI – SSC – CIT – UCP
+TP
6. Disposable Income (DI) = PINc – PT
7. Personal Savings (PS) = DI – PS
Business Cycle
 Key Market Indicators
• Civilian Labor Force
• Unemployed
• Labor Force Participation Rate
• Unemployment Rate
• Full Employment
• Natural Rate of Unemployment
• Inflation
– Anticipated Inflation
– Unanticipated Inflation
 Keynesian Theory
• Average Propensity (Tendency) to Consume
(APC)
• Average Propensity to Save (APS)
• Marginal Propensity to Consume (MPC)
• Marginal Propensity to Save (MPS)
 Problem 6:
• A consumer has the following consumption patterns at
different income levels
Income Consumption
P 500 P 260
600 320

Required:
1. Average Propensity (Tendency) to Consume (APC)
2. Average Propensity to Save (APS)
3. Marginal Propensity to Consume (MPC)
4. Marginal Propensity to Save (MPS)
 FISCAL POLICY
• Involves government expenditures and/or
taxes to stabilize the economy.
MONETARY POLICY
 Problem 7:
Suppose the country of Marie-joan has the following
monetary asset information as of April 2016:
Cash in hands of the public $300B
Demand Deposits (DD) $400B
Other Checkable Deposits $150B
Traveler’s checks $50B
Savings Type accounts $2,000B
Money Market Mutual Funds (MMMF) $1,000B
Small Time Deposits $500B
Large Time Deposits $450B
Required:
1. Calculate M1 for Marie-joan.
2. Calculate M2 for Marie-joan.
3. Which item is not included in the calculations of M1 and
M2?
 Problem 8:
Suppose Joey deposits $100,000 in Bank 1 and the Bank 1 loaned
the maximum amount to Ping. Ping deposits the loaned
amount with Bank 2. The required reserve ratio for all banks
(set by the Central Bank) is 20%. Assume that there are no
currency drains.
1. What is the level of required reserves Bank 1 must hold after
Joey’s deposit?
2. What is the level of required reserves Bank 2 must hold after
Ping’s deposit?
3. How much is the total new money?
4. What is the Money Multiplier?
5. If Bank 2 loaned $50,000, how much is the bank’s actual
reserve? Required reserve? Excess Reserve?
GOOD LUCK! GOD BLESS! GOD SPEED!

“Thy will be done”

-Lk 11:2