Economic Assignment

Price. L. What is the estimated regression equation? Y = a + џ(x) sales = 390. 38-14. 26 (selling price) II. Is selling price of a significant determinant of sales? At what level(s) of significance? Yes, selling price indeed a significant determinant of sales. This is supported by the reading of P value which is 0. 001, whereby 1 – 0. 001 = 0. 999. This can be translated that the finding is 99. 9% confidence and therefore, it can be concluded that there is a positive relationship between selling price and sales. Ill.

Therefore, it can be translated that there is 99% confidence that labor and capital are very influential on the output. The probability for both the capital and labor is less than 0. 05, which means the co-efficient of capital and labor are statistically significant. C) Determine the percentage of variation in the output that is being “explained” by the regression equation. The percentage of variation in the output that is being “explained” by the regression equation is 94. 8%. D) Determine the labor and capital estimated parameters, and give an economic interpretation of each value.

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The estimated parameters for labor and capital are 1. 08 & 0. 42. Whenever there is a increase by 1% in the labor, there will be increase by 1. 08% in the output. If there is a increase of 1% in the capital, there will be increased of 0. 42% in the output. E) Determine whether this production function exhibits increasing, decreasing or constant returns to scale. The rules to decide the production function exhibit increasing, decreasing or constant returns to scale; If Pl + UP = 1, CARTS (Constant returns to scale) If Pl + UP > 1, ARTS (Increasing returns to scale) If Pl + UP < 1, CRTS (Decreasing returns to scale) a =0. 861, = 1. 0780, = 0. 4152 In this case, Pl = 1. 0780+ 0. 4152=1. 4932 Since Pl + P2 > 1, the outcome indicates that the production function exhibit increasing returns to scale. Humid Oil (HOST) is a sole proprietor, producing oil palm in a large scale. The land and machinery he owns has a current market value of ARM million. HOST owes a local bank ARM million. Last year HOST sold ARM million worth of oil palm. Its variable operating cost were ARM. 5 million; accounting depreciation was RAMP,OHO, although the actual decline in value of HOST machinery was RAMP,OHO last year.

Humid paid himself a salary of RAMP,OHO, which is not considered as part of HOST variable operating costs. Interest on the bank loan was ARMOR,OHO. If Humid worked for another oil palm producer or a local manufacturer, his annual income would be about RAMP,OHO. Humid can invest any funds that would be derived, if the farm were sold, to earn 10 percent annually. (Ignore taxes) a. Compute Handmaid’s accounting profits. Accounting Profit = Total revenue – Explicit cost Revenue Explicit Cost : – operating cost: AC depreciation . 40,000. 00 Salary Loan interest 50,000. 00 400,000. 00 b. Compute Handmaid’s economics profits.

Economic Profit = Total revenue – (Explicit cost + Implicit cost) Implicit Cost Wages foregone . Opportunity cost of (20,000. 00) Capital 100,000. 00 (ARM 1 Mill 10%) Actual depreciate: Economic Profit 20,000 – 90,000. 00 c. Based on the answers above, what would be the better option for Humid, financially? Since the economic profit is negative, the better option for Humid, financially is to stop operation of his business and to proceed to invest all the funds derived from selling off the farm. PART 4 You have been hired as an economic consultant to assess the potential of profitably