Question

42) What is the effect of each of the following impacts on reserves of. 'X Answer as increase, decrease, ?, no effect (a) New technology in production (b) Increase in production cost (c) Taxes (f) Increase in price of "X, (g) New technology in consumption (h) Exploration 43) What is multicollinearity? What impact might it have on the econometric model 44) A property owner is faced with three options (A, B, C) to choose from (A) A large-scale investment (A) to improve her flats This could produce a substantial pay-off in terms of increased revenue net of costs but will require an investment of RO 1,400,000. After extensive market research İt is considered that there is a 40% chance that a pay-off of RO2.500,000 will be obtained, but there 1.60% chance that it will be only RO 800,000. A smaller scale project (B) to re-decorate her premises.At RO 500,000 this is less costly but will lower pay-off. Research data suggests a 30% chance of a gain of RO 1,000,000 RO 500,000. but a70% chance of it being only Continuing the present operation without change (O. It will cost nothing, but neither will it produce any ff. Clients will be unhappy and it will become harder and harder to rent the flats out when they become free decision tree approach to help the property owner make her decision. Draw a properly labelled decision tree, clearly indicating pay-offs for the activities that are indicated According to results from the tree, which decision is optimal? Why?

Answer 1

42).

1. New Technology in production :- The new technology is always introduced to reduce the cost of production or mass production. The impact is directly on the cost of production as it goes down. DECREASE
2. Increase in production cost :- As the word suggest, there is an INCREASE in the production cost, so the per unit cost would increase.
3. Taxes :- If taxes are increased, it would increase the cost of unit, but if they are reduced then the cost will decrease.
4. Increase in price of "X" :- If "X" is a contributing factor in the production process, then it would increase the cost of the unit.
5. New technology in consumption : New technology in consumption might increase the consumption of the product. But if the technology introduced is up-gradation of the consumption pattern, then it would kill the sales of the current product. Eg :- Electric bulbs getting replaced with the new LED bulbs and tubes.
6. Exploration : Exploration would not have a direct impact on the cost of the unit as this is more a cost of R&D. So it would not be considered. NO EFFECT.

43). Multicollinearity :- when two or more explanatory variables in a multiple regression model are highly linearly related or high intercorrelations among independent variables, then it is referred as Multicollinearity. In general this leads to less reliable probability values (P value) for the independent variable.

ECOCENTRIC Model is the philosophy or perspective that places intrinsic value on all living organisms and its environment. This value might not have any importance to human beings.

The reasons for multicollinearity :-

• inaccurate use of dummy variables for every category (Eg spring, summer)
• inclusion of variables from other data sources.
• repetition of same kind of variables.
• variables are highly correlated to each other.

In ecocentric models variables such as age, height, weight, impact of parents habits on child, years of education, price of cars,