a)
To evaluate the variables that are statistically significant in explaining variations in the average operating expense ratio
a)
Explanation of Solution
In statistics the t-statistics is the ratio of the departure of a parameter's estimated value from its hypothesized value to its standard error. It is used via the Student's t-test in hypothesis testing. For a T test the T-statistic is used to determine whether the null hypothesis should be accepted or rejected.
These variables are tested at the statistically significant level of 5% that is 0.5.
Variable is significant, that is t value is larger than 0.025; the value of 0.025 is around 2. All the t values of variable are greater than the 2.00; hence, all values are significant in explaining the cause and effect relationship.
Introduction: The Operating Expense Ratio (OER) is a measure of the cost of operating a piece of property compared with the property’s revenue. It is calculated by dividing the operating expense (minus depreciation) of a property by its gross operating revenue and is used to compare expenses of similar properties.
c)
To evaluate the conclusion about the existence of economies or diseconomies of scale in savings and loan associations in the northwest
c)
Explanation of Solution
The cost analysis is concerned with determining the money value of inputs (labor, raw materials), referred to as the total cost of production which helps to determine the optimum production level.
It can be concluded here that cost and output relationship show that the shape of cost is U shaped, U shape of cost curve denotes that cost decreases up to the certain point and economies of scale ensues. After the certain level of output, economies of scale changes into diseconomies of scale.
Introduction: Economies of scale are cost advantages that businesses reap when production is successful. By rising production and reducing costs, businesses can achieve economies of scale. It is because it spreads prices over a larger variety of products. The costs may be fixed as well as variable.
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Chapter 9 Solutions
Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)
- The monthly demand equation for an electric utility company is estimated to be p=55- (105)x, where p is measured in dollars and x is measured in thousands of killowatt-hours. The utility has fixed costs of $1,000,000 per month and variable costs of $27 per 1000 kilowatt-hours of electricity generated, so the cost function is C(x)=1-10° +27x. (a) Find the value of x and the corresponding price for 1000 kilowatt-hours that maximize the utility's profit. (b) Suppose that the rising fuel costs increase the utility's variable costs from $27 to $39, so its new cost function is C₁(x)=1.10° +39x. Should the utility pass all this increase of $12 per thousand kilowatt-hours on to the consumers?arrow_forward1. Exercise 9.1 A study of 86 savings and loan associations in six northwestern states yielded the following cost function. 2.38 0.006153Q 0.000005359Q² 19.2X1 C + + (2.62) (2.84) (3.16) (3.50) where C = average operating expense ratio, expressed as a percentage and defined as total operating expense ($ million) divided by total assets ($ million) times 100 percent. Q = output; measured by total assets ($ million) X1 = ratio of the number of branches to total assets ($ million) Note: The number in parentheses below each coefficient is its respective t-statistic. Which of the variable(s) is (are) statistically significant in explaining variations in the average operating expense ratio? (Hint: t0.025,7€ 1.99 .) Check all that apply. X1 Q2 What type of average cost-output relationship is suggested by these statistical results? Quadratic Linear Cubic Based on these results, what can we conclude about the existence of economies or diseconomies of scale in savings and loan associations in…arrow_forwardA study of the costs of electricity generation for a sample of 56 British firms in 1946-1947 yielded the following long-run cost function: (Source: Johnston, "Chapter 4," in Statistical Cost Analysis) AVC = 1.24 + 0.0033Q + 0.00000290² Q = output; measured in millions of kWh per year Z = plant size; measured in thousands of kilowatts where AVC = average variable cost (i.e., working costs of generation), measured in pence per kilowatt-hour (kWh). (A pence was a British monetary unit equal, at that time, to 2 cents U.S.) What is the long-run total variable cost function for electricity generation? 1.24 +0.0033 +0.0000029Q -0.000046Z 0.026Z 0.000182² Q Q Q ○ 0.0033 +20.0000029Q -0.000046 Z O 0.0033Q +20.00000290² - 0.000046 QZ O 1.24Q +0.0033Q² +0.0000029Q³ – 0.000046Q²Z – 0.026ZQ+0.00018Z²Q What is the long-run marginal cost function for electricity generation? 0.000046 QZ O 0.0033Q +20.0000029Q² +0.000046 QZ O 1.24 +0.0066Q+0.0000087Q² - 0.000092QZ – 0.026Z+0.00018Z2 O +0.0033…arrow_forward
- A company makes solar panels. The company's revenue function, in dollars, is R(n)= 10n , where n is the number of panels produced. The cost function is C(n) = 100(2)30 . R and C are shown on the graph below. 1000 800 600 400 200 20 40 60 80 100 1 Number of Panels a) Estimate from the graph i) the break-even points e) How would your answers for break-even points and maximum profit change if i) the number of dollars of revenue per panel is increased slightly? ii) the cost function is changed to C(n)=100(2)35 ? f) What does the number that was changed in part e) ii) represent? Dollarsarrow_forwardA musical Disc is being produced by a music recording studio, and the company estimates that it will cost $100,000 to record the Disc and $6.75 per unit to duplicate and distribute the Disc. The Disc wholesale cost is $19.95. (a) Find the cost and revenue functions (b) Find the profit function (c) Find the number of Disc’s the company must produce and sell in order to break even (d) Draw a graph with the cost and revenue functions on the same axes, indicating the breakeven point.arrow_forwardConsider the following cost function: C(Q)=9,300+44Q+0.025Q 2 Calculate total costs when Q=180arrow_forward
- For the cost function CQ) = 100 - 20 - 304, the total variable cost of producing 2 units of output is:arrow_forwardGiven Cost and Revenue functions C(q)=q3−10q2+52q+5000 and R(q)=−3q2+2400q, what cost is incurred when marginal profit is $0?arrow_forwardC(Q) = 100 + 20Q + 15Q2 + 10Q3 Based on the cost function, determine: The average fixed cost of producing 10 unit of outputs The average variable cost of producing 10 unit of outputs The marginal cost when Q= 10arrow_forward
- Q2) A shop which sells T-shirts has a demand function and a total cost function given by the equations P = 240 − 10Q and TC = 120 + 8Q (a) Write down the equations for TR and profit. (b) Calculate the number of T-shirts which must be sold to maximize (i) profit, (ii) total revenue. (c) Write down the equations for MR and MC.arrow_forwardSuppose the fridge daily cost function produced at Friga's Frigid Fridges is represented by the following C(x) = x-2 x3 2000 50 (a) Find the differential of the daily cost and use it to approximate the cost change if the current production is at 500 units and 5 more units are produced. (b) Find the actual cost difference function and use that to calculate the cost for the 501st unit. (c) Find the marginal cost function, evaluate C' (500), and interpret your results. + 50x + 20, 000arrow_forwardHere is the production cost function, in $ of producing q units of a product: 2200 C(q) = 300 +0.8q2 + %3D and the demand function of the product is: p(x) = 200 - 0.05q a. Determine the marginal cost, marginal revenue and marginal profit when q=50 and q=150? b. Interpret the results of the calculation in part (a) if it is related to cost, revenue and profit?arrow_forward
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