Econ 325: Exam 1 Study Guide
1. Be prepared to answer questions similar to the following homework problems:
a. Chapter 1
i. Case Questions: 1, 2, 3 (do with pencil and paper only)
ii. Exercises: 1, 2, 3, 4 (use pencil and paper only for these first 4 questions), 7, 8
(use Excel only for these final 2 questions)
2. Sampling Distribution
a. Draw either (1) the hypothetical graph I plotted on time to death following life-saving
surgery (y axis) versus hospital size (x axis) or (2) the graph from “The Most
Dangerous Equation” article on age-adjusted kidney-cancer rates in U.S. counties
plotted against county population.
b. Superimpose on your graph 3 different distributions on Xbar for a small, medium,
and large size hospital (or small, medium, and large size county population).
c. What is the relevance of sample size and confidence intervals to the appearance of
your graph?
d. So, given your graph, what do we know about small city hospitals (or small county
kidney-cancer rates) relative to big city hospitals (big county kidney-cancer rates)?
That is, can we say much about small city hospitals (small county kidney-cancer
rates) relative to large city hospitals (large county kidney-cancer rates)? Why?
e. I know a very small Masters in Business Administration (MBA) program in the
eastern part of the country that recently had among the highest salaries of graduates of
any MBA program in the country, despite being relatively easy to get into with a
relatively affordable tuition. Quickly (concisely), what do you think of this?
3. Introduction to forecasting
a. What is perhaps the most important and frequently acquired benefit of forecasting in
business?
b. What is inventory management?
c. Why is it important to a firm? List two reasons.
d. What is the relevance of the interest rate to one of your reasons?
e. What is the relevance of future sales to one of your reasons?
f. List the different operational areas of a firm where forecasting is used.
g. What is the relationship of forecasting to supply chain management?
h. What benefits does forecasting have to offer supply chain management?
i. What is collaborative forecasting?
j. Describe the process.
k. What are the benefits?
l. What are the costs?
m. What is the 80 / 20 rule as it applies to forecsting?
n. List (and explain) the different qualitative or subjective forecasting methods we have talked
about that that are not specific to new product forecasting.
o. For two of the qualitative methods discussed, the difference between them came down to
anonymity. Give reasons why this anonymity may be important.
p. What are the advantages of subjective forecasting?
q. What are the disadvantages of subjective forecasting?
r. When is qualitative forecasting perhaps most appropriate?
s. List (and explain) the different qualitative or subjective forecasting methods we have talked
about that pertain exclusively to new product forecasting.
t. Describe and draw the new product forecasting model we discussed in class.
4. Quantitative forecasting methods
a. Write out the two simple naïve models presented in chapter 1.
b. Explain in words what each does (be sure to interpret any coefficients).
c. Suppose you had to choose between these two forecasting methods. How would you
do so?
d. In the gap sales data analyzed in your homework, would there be much of a difference
between a forecast using the naïve 1 forecasting model (using 4 quarter lagged data) and the
naïve 2 forecasting model (using 4 quarter lagged data)? Why or Why not?
e. Why or why not?
f. Imagine you had a more sophisticated modified naïve type of forecasting model which used
much more past data to make a forecast which essentially projected forward the average
growth rate from past data.
i. What type of model have we used in this class that meets this description?
g. In what type of market or macroeconomic environment would this be useful? Give an
example. (Use your subjective forecasting skills in answering this question.)
h. In what type of market or macroeconomic environment would this not be useful? Give an
example. (Use your subjective forecasting skills in answering this question.)
i. Give as many reasons you can think why subjective forecasting methods can be useful.
j. Would one ever want to combine two forecasts obtained from two different forecasting
methods? Why? How would one go about doing this?
k. What are some popular sources of data for firms wishing to do quantitative
forecasting?
l. List six different methods for evaluating forecasts.
m. For each method, explain
i. what it measures.
ii. what you like or dislike about it.
5. Six Considerations Basic to Successful Forecasting
a. What is a loss function?
b. What is the relationship between a loss function and the different measures of error
we discussed in chapter 1.
c. What is a symmetric loss function?
i. Give an example.
d. What is an asymmetric loss function?
i. Give an example.
e. What concept lies behind the selection of a quadratic loss function?
f.
g.
h.
i.
j.
k.
Give an example when having high inventory can be detrimental to a firm.
Draw a graph of a preferred loss function in this instance.
Give an example when having low inventory can be detrimental to a firm.
Draw a graph of a preferred loss function in this instance.
When is a quadratic loss function preferred?
Give equations of two evaluation criterion which are closely related to the quadratic loss
function.
l. Discuss the different types of Forecast Objects.
m. Discuss the different types of Forecast Statements.
n. What are the two key considerations regarding the Forecast Horizon?
o. What are the two key considerations regarding the Information Set?
p. What are the four concepts behind the Parsimony Principle?
6. Statistical Graphics for Forecasting
a. Describe Anscombe’s Quartet.
b. What is the same about the four included data sets?
c. What is different about the four included data sets?
d. What is the concept that Anscome’s Quartet is trying to get across?
e. What is a time series plot?
f. What is a histogram?
g. What is a scatterplot matrix (i.e., a multiway scatterplot)?
h. What is the use of a scatterplot matrix?
i. The power of graphics is that they allow what three things?
j. List and describe each of the basic goals to good graphics?
k. Why should on minimize non-data ink when presenting graphics?
l. Give three examples of chartjunk mentioned in the gook.
m. How does one “appeal to the viewer” when presenting graphics?
n. What is the aspect ratio? Both explain in words what it is and give a formula.
o. What is the golden ratio?
p. What does it mean to bank to 45 degrees?
q. Be prepared to identify all problems with a graphic that is displayed on the exam?
7. The Forecast Process, Data Considerations, and Model Selection
a. Why is it important to specify objectives in the forecast process?
b. What are the determinants of model selection in the forecast process?
c. What is the “fit” of a model?
d. What is the “accuracy” of a model?
e. What is a “holdout period” when forecasting?
f. What is the use of a holdout period?
g. What is the use of tracking results after a forecast has been made?
h. What is the best way to make a forecast when two methods are available which have
different information bases?
i. What is the key aspect of forecast presentation?
j. Describe and draw the following data patterns: trend, seasonal, and cyclical
k. What is the irregular component of a data series?