ECO704 Assignment 1 Solution and Discussion


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    SEMESTER FALL 2019
    MANAGERIAL ECONOMICS (ECO704)
    ASSIGNMENT # 1
    Due date: 3 Dec 2019 Marks: 10
    CASE 1:
    IGI Insurance offers mail-order automobile insurance to preferred-risk drivers in any area of Pakistan. The company is the low-cost provider of insurance in this market but doesn’t believe its Rs.750 annual premium can be raised for competitive reasons. Its rates are expected to remain stable during coming periods; hence, P = MR = Rs.750. Total and marginal cost relations for the company are as follows:
    TC = 2,500,000 + 500Q + 0.005Q2
    MC = ΜTC/ΜQ = 500 + 0.01Q
    A. Calculate the profit-maximizing activity level.
    B. Calculate the company’s optimal profit level and optimal profit as a percentage of total sales revenue (profit margin).
    (Marks: 2 + 3)
    CASE 2:
    Etehad Group of Companies has been on the forefront of design and development, by coming up with new products and increasing presence in all its featured markets. Established in Lahore in year 1957, today the Etehad Group of Companies is one of the largest consumer goods companies of Pakistan. Its products have proven themselves in functional performance parameters set by international industry experts. With the vision to become leaders of the industry, Etehad strives to make each of its products, with careful R&D and intensive innovation. Company has a constant sales growth rate of 35% and it wants to forecast the sales level for year 2019 based upon previous years (2010-2018) sales pattern that is given in the following table:
    Actual Sales (in millions)
    Years
    2010 25
    2011 27
    2012 23
    2013 20
    2014 22
    2015 18
    2016 23
    2017 29
    2018 28

    a) Forecast sales level of Etehad Company for 2019 through exponential smoothing by using 0.4 and 0.6 weights for actual values.
    b) Analyze which weight is more feasible for data forecasting?
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