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Assignment 2, Winter 2014

1. You have been provided with sales data (dependent variable) and advertising and quality control data (independent variables) for 10 years (Excel File called DataAssignment2, sheet 1). Use it to perform an economic analysis. Discuss fully (include a discussion of what other data or information you would make use of, if you had access to it).
(20 marks)

2. You have been provided with data for Gasoline Sales in the US (in thousands of barrels) from the first quarter of 1995 to the last quarter of 1998 (Excel File, sheet 2).
a) Estimate the linear trend and use it to forecast gasoline sales in the US in each quarter of 1999.
b) Estimate the log-linear trend in the data, and use it to forecast gasoline sales in the US in each quarter of 1999.
c) Which is better and why? Why would you expect both forecasts to be rather poor?
d) Adjust the linear trend projection you calculated in (a) for the seasonal variation in the data by using dummy variables. (20 marks)

3. In the Elmira Handy Hands company, the relationship between output (Q) and the number of hours of skilled labour (S) and unskilled labour (U) is:
Q=300S+200U-.2S^2-.3U^2
The hourly wage of skilled labour is \$10, and the hourly wage of unskilled labour is \$5. The firm can hire as much labour as it wants at these wage rates.
a) The company owner thinks that he should hire 400 hours of skilled labour and 100 hours of unskilled labour. Evaluate this strategy.
b) If the company owner decides to spend a total of \$5,000 on both skilled and unskilled labour, how many hours of each type of labour should be hired?
c) If the price of a unit of output is \$10 (and does not vary), how many hours of unskilled labour should be hired?
(20 marks)

4. Suppose you have just been hired as the new production manager of EcoSteel. There are three plants currently producing 1cm sheet steel of identical quality. Total cost of production in plant 1 is: C1=1+10q1 where q is measured in tons and C is in dollars. The total cost function in plant 2 is: C2=10+.5?(q2)?^2+2q2 and cost at plant 3 is given by: C3=5+?(q3)?^2
a) Traditionally, 10 tons of steel have been produced each period. Plant #1 has produced 2 tons, plant #2 has produced 4 tons, and plant #3 has produced 4 tons. You have been assigned the dask of developing ways to reschedule production among plants to reduce costs, given that the output level remains at 10 tons per day. What changes, if any, do you suggest?
b) You question whether output of 10 tons per day is profit maximizing. Suppose the current market price is \$6 per ton, and the market is competitive. Would you change total output? Is so, how?
c) If your suggestions are implemented, what will profits be?
(20 marks)

5. This Case Study shows how the Ford Motor Company went about creating a true world automobile after several failed attempts in response to the globalization of consumer tastes across the world, from Ã¢â‚¬Å“FordÃ¢â‚¬â„¢s Bet: ItÃ¢â‚¬â„¢s a Small World After All.Ã¢â‚¬Â The New York Times,Sunday Business (January 10, 2010, page 1)

He blew into the Ford Motor Company in 2006 as an outsider from a different industry, and he was hailed as the latest in a long line of purported saviors of a faltering, century-old automotive icon. Three years into his tenure as chief executive-and with a host of still nettlesome challenges awaiting him-Mr. Mulally proved to be the unifying figure that Ford has needed for decades. And on Monday, at the opening press conference of the 2010 Detroit auto show, Mr. Mulally will unveil the car that embodies his strategy for returning Ford to its status as a leader in the global auto industry.

That car, the new Ford Focus, is arguably as important to Mr. Mulally as the Model T was to Henry Ford, the founder. Despite some previous efforts, the Focus is Ford's first truly global car-a single vehicle designed and engineered for customers in every region of the world and sold under one name. It is small, fuel-efficient, and packed with technology and safety features that,
Mr. Mulally believes, will appeal to consumers in Europe, Asia, and the Americas.

The car also represents what Mr. Mulally calls the -proof point- of everything he has done since joining Ford after a 37-year career with Boeing: he hopes that the vehicle will provide a rolling blueprint for generations of Ford cars to come.

Ford in the U.S. Automobile Industry
In an industry populated by naysayers and familiar with wrenching disappointment, Mr. Mulally's doubters have largely disappeared because he has already delivered more than what was expected of him when he replaced Ford's chairman, William C. Ford Jr., as chief executive.

One of Mr. Mulally's first, prescient acts in 2006 was to borrow \$24 billion, which later gave
Ford the cash it needed to stave off the government-sponsored bankruptcies of its cross-town rivals General Motors and Chrysler. He has also shifted Ford's emphasis away from trucks and sport utility vehicles to cars and crossover vehicles, and dumped luxury brands like Land Rover, Jaguar, and Aston-Martin that were consuming Ford's resources and distracting management.

Perhaps most important, Ford has shrunk drastically, shedding jobs and factories to better align its production with demand. For decades, Ford executives and workers labored inside a bureaucracy that made decision making cumbersome and often undermined dexterous responses to market shifts. It was a system that also withstood repeated efforts by others to streamline it.

But under Mr. Mulally's hand-and in response to a downturn that threatened the very existence of Detroit's Big Three-Ford has finally started to run a tighter ship. All of this is beginning to show up in Ford's bottom line. It reported \$1 billion in earnings in the third quarter of 2009, its first profitable quarter in nearly two years. Mr. Mulally, however, says he doesn't expect Ford to become -consistently- profitable until 2011, when the new Focus will begin appearing in sizable volumes in the United States and Europe. While the Focus is only one of several new products on the way, it is the centerpiece of Ford's transformation from a truck-heavy manufacturer to a producer of smaller, lighter, and more environmentally friendly passenger cars.

The impact of the Focus on Ford's global operations is even more significant. While Ford has been an international company since early in the twentieth century, its overseas divisions have long a operated as semiautonomous units geared to individual markets. Upon his arrival, Mr. Mulally took his own shot at knitting together Ford's far-flung operations, seeking the economies of scale that a -world car- could bring. The new Focus is built on one platform for all markets, from Shanghai to Seville to Seattle. The platform is also flexible enough that it can be adapted for different body styles, whether hatchbacks or small crossover vehicles. Within a few years, Ford expects to sell as many as 2 million vehicles a year off the new C-car platform and.to save billions of dollars in costs by avoiding multiple platforms.

Staking Ford's Future
A youthful-looking 64-year-old with close-cropped red hair and a toothy smile, Mr. Mulally was also prepared to stake Ford's future on a thesis that consumers around the world are becoming more and more alike, and that what they want in a car is the same in China and India as it is in Germany or the United States. -Everybody knows everything, and everybody knows what's available,- says Mr. Mulally. -You look at the reasons people buy vehicles, and all those requirements are coming together.

-The very first conversation that I had with Alan was the opportunities that we had never taken full advantage here at Ford,- says Derrick M. Kuzak, a 30-year Ford veteran and the head of global product development. Mr. Kuzak was keenly aware of how important it was to embrace Mr. Mulally's emphasis on global product development. -It would allow us to bring our vehicles to market quicker than we have ever been able to do in the past. The benefits were in the neighborhood of 25 percent to almost 50 percent quicker time to market.- So the Focus team ended up rallying around a few main objectives. The car had to drive and handle like a European sedan and have the creature comforts like wireless Internet access that American consumers demanded.

Toward the end of 2008, Ford conducted dozens of market research clinics with potential customers in several countries. In the clinics, the team learned that it could tailor the interior of the Focus for different regions by simply changing colors and materials rather than pursuing larger design changes that would have been more complex and expensive to manufacture. The Focus is also serving as a laboratory for sweeping changes in how Ford markets its vehicles.

Ford's previous C-car models had not only different and distinct engineering platforms but also as many as 20 advertising campaigns. James Farley, Ford's global marketing chief, said the new Focus would have just four or five ad strategies around the world. Mr. Farley says that in the past, Ford had to shape the ads based on vehiclesÃ¢â‚¬â„¢ differences. Now, any variation will be based on the campaign's audience. With the new Focus and other passenger cars in the product pipeline, he expects to compete head-on with Toyota, Honda, and other leaders in the car market.

1. Why is the new Ford Focus probably as important to Ford today as the Model T was to Henry Ford a century ago?
2. What restructuring strategy did Ford follow since Alan Mulally took over as CEO in 2006?
3. How did Ford avoid filing for bankruptcy (as General Motors and Chrysler did) in January
2009?
4. Why was Ford able to introduce a truly global automobile only now? What benefits does Ford expect from its new Ford Focus?
(20 marks)