G202 Topic 9

What does regression analysis do and what does regression specify?

It finds the equations for demand and cost. Regression specifies the line that minimizes mean squared error.

What is prediction error for a data point?

PE = observed value - predicted value

The lower the square root of Mean Squared Error, the _____ accurate a predictor is the regression line

More

Predicted cost of a sustainable product is _________ (higher/lower) at scale and ________ (more/less) accurate than predicted cost of establish product.

Higher, more

Given the profit function pi(Q) = R(Q) - C(Q)  how do we maximize profit?

Take the derivative and set equal to 0.

R’(Q) is equal to what?

Marginal Revenue

C’(Q) is equal to what?

Marginal cost

What is the cost function 

C(Q) = a + bQ

What is the demand function

P(Q) = m + nQ

Derivative of the revenue function

R’(Q) = m + 2nQ

What is the quantity Q that maximizes profit?

Q* = (b-m)/2n

How to find the economic value added by sustainability

π(Q*) for the new sustainable product - π(Q*) for the established product.

How do you calculate contribution margin per unit?

CM=P−v (price minus variable cost per unit)

How does replacing a cost-minimizing product with a sustainable product affect cost?

Fixed and/or variable costs usually increase.

How does replacing a cost-minimizing product with a sustainable product affect demand?

Demand may increase if consumers value sustainability and are willing to pay more.

How do you determine if investing in sustainability is worth the extra cost?

If the present value of all future cash inflows is greater than the initial cash outflow, or NPV > 0

FV formula

The future value FV of X now in N years is (1+i)^N times X, where X is the amount invested now and i is the interest rate

PV of future cash inflows formula

X / (1+i)^N