I. Create a table and answer the following questions. Show your work.

Observaciones

GPA = Y

ACT = X

X-

2.8

21

-4.875

-0.4125

2.0109375

23.765625

0.17015625

3.4

24

-1.875

0.1875

-0.3515625

3.515625

0.03515625

26

0.125

-0.2125

-0.0265625

0.015625

0.04515625

3.5

27

1.125

0.2875

0.3234375

1.265625

0.08265625

3.6

29

3.125

0.3875

1.2109375

9.765625

0.15015625

25

-0.875

-0.2125

0.1859375

0.765625

0.04515625

2.7

25

-0.875

-0.5125

0.4484375

0.765625

0.26265625

3.7

30

4.125

0.4875

2.0109375

17.015625

3.2125

Y-

(X- )*(Y-)

(X- )*(Y-)

25.875

5.8125

(X- )

(i) Estimate the relationship between GPA and ACT using OLS; that is obtain the intercept and slope estimates in the equation. (using the approach discussed in lecture 4 exercise: regression).
General Equation =
b =Slope =

GPA =a +b (ACT)
(X-)*(Y-)

5.8125
=

(X-)

a = Intercept=

- b =

0.102197802

0.102197802

56.875

3.2125

(ii) Comment on the direction of the relationship between GPA and ACT.
The relationship between GPA and ACT is positive or direct.

25.875

(Y-)

(X- )

0.568131868

56.875

0.23765625
SST=(Y-)

1.02875

(iii) Derive the estimated equation

General LINEAR Equation

GPA = a +b (ACT)

=
GPA =

0.5681

0.102197802

ACT

0.5681

0.102197802

20

Predicted GPA = Y

(iv) What is the predicted value of GPA, if ACT score is 20?

For ACT =20
GPA =

2.61

(v) How much of the variation in GPA is explained by ACT? (hint: R2 or R^2 )
GPA = a + b (ACT)

(Y - ) 2

Observaciones

GPA = Y

ACT = X

2.8

21

2.71

0.2482175

3.4

24

3.02

0.0367186

26

3.23

0.0001632

3.5

27

3.33

0.0132187

3.6

29

3.53

0.1019960

25

3.12

0.0079965

2.7

25

3.12

0.0079965

3.7

30

3.63

3.2125

R2 =

SSE

0.59402
=

SST

0.1777178
SSE=(Y - )2 =

25.875

=
1.02875

0.577423791

0.5940247

SST=(Y-)

1.02875

II. Net Present Value. Show your work.

Consider two investment ventures with a four-year life each. The first project (Project Y) will bring $2,000, $3,500, $4,000 and $4,000 in benefits with costs of $1,000, $1,500, $1,000 and $2,000 within the four consecutive years. On the other hand, the
second project (Project X) will generate $2,500, $3,000, $4,000 and $3,000 on income with $1,000, $2,500, $2,500 and $3,500 in costs within the life of project. Project Y is expected to have an initial investment of $ 6,500 while Project X of $2,000.
a. Which project would you pursue as the best investment opportunity?
Proyect Y
Year 1

Year 2

Year 3

Year 4

Benefit

2,000

3,500

4,000

Cost

1,000

1,500

1,000

Cash Flow

1,000.00

2,000.00

3,000.00

initial investment =
N1

NPV =

N2

(1 + i)2

(1 +i)

$
N3

4,000
2,000
$

2,000.00

6,500.00
N4

(1 + i)3

(1 + i)4

i = 6%
$

1,000.00

NPV =

2,000.00

3,000.00

1.0600

2,000.00

1.1236

1.1910

NPV =

943.40

1,779.99

2,518.86

Proyect Y NPV =

6,826.43

6,500.00

326.43

1.2625

1,584.19

Proyect X
Year 1

Year 2

Year 3

Year 4

Benefit

2,500

3,000

4,000

Cost

1,000

2,500

2,500

$1,500.00

Cash Flow

$500.00

$1,500.00

3,000
3,500
-$500.00

initial investment =

$2,000.00

i = 6%
$1,500.00
NPV =

$500.00
+

1.0600

$1,500.00
+

1.1236

-$500.00
+

1.1910

NPV =

$1,415.09

$445.00

$1,259.43

Proyect X NPV =

$2,723.47

$2,000.00

$723.47

1.2625
+

-$396.05

I should invest on the Project X

III. Expected Value

1. Suppose that you ask your father for some extra money. Instead of just giving you the money, he offers to flip a coin. If the coin lands heads - you win and he will give you $20.00 (XH = 20). If it lands tails, you lose, and you receive nothing (XT = 0) in which probability of head is defined as PH

Father's offer
Coin

Probability (P)

Value (X)

P*(X)

Head

0.5

$20

$10

Tail

0.5

Sums of P

Expected Value

$10

Morher's Offer

Dice Num

Probability (P)

0.1667

Value (X)
3.00

P*(X)
0.50

0.1667

6.00

1.00

0.1667

9.00

1.50

0.1667

12.00

2.00

0.1667

15.00

2.50

0.1667

18.00

3.00

Sums of P

1.0000

10.50

Expected Value

I would take Mother's offer based on expected value

2. A firm makes computer ships. One out of each 50 chips is defective, but the firm doesn't know which ones are damaged until a consumer complains. Suppose the firm makes a $4.00 profit on the sale of any working chip, but
suffers a loss of $80.00 for every defective chip because they must spend money on its reparation.
a. How much profit this firm would make on average per chip? In other words, find the expected value.
Outcome

Probability (P)

Good

0.98

Value (X)

Defective

0.02

Sums of P

P*(X)
4.00
(80.00)

Expected Value

This firm would make $2.00 profit on average per chip

$3.92
$

(1.60)
$2.32

V. Profit Maximization and Cost Minimization (show your calculations)

1. Assuming that the profit function for Arecibo Renewable Energy Sources, Inc. is as follows:
= -10 + 100Q 20Q2

a. Find the profit maximizing output level of this function.

d-dQ = 100 40Q

1st derivative:

0 = 100 40Q
Q=

2.5

Profit maximizing output level

b. Is it the maximum or minimum level of output?

2nd derivative

d2-dQ2 =

-40
Since d2 / dQ2 < 0 (negative), a maximum profit point has been reached.

2. Assuming that the cost function for Pepe Ganga has been derived as follows:
C = 200 0.032Q + 0.000070Q2

a. Find the output level based on the given cost function

1st derivative:

dC-dQ =

-0.032

0.00014

0=

-0.032

0.00014

Q=

229

units output level

b. Is this level of output minimizes total costs?

2nd derivative

d2C-dQ2 =

0.00014

Since d2C / dQ2 > 0 (positive), the output level of Q = 229 is the value that minimizes total costs.