QUESTION 1 Suppose a manufacturing firm has two factories (Factory 1 and Factory 2), and a single production process (Process A) that is used in both factories. A new process (Process B) is developed that potentially reduces production costs. To test whether Process B is less costly than Process A, an experiment is designed where: 1. Within each Factory, products are assigned randomly to Process A or Process B. 2. Production costs for each product are recorded. Note that resources (i.e. materials, workers, equipment) are not reassigned across factories. Let Y be the cost of producing product i, let X; be 1 if Process B is used to produce i and 0 if Process A is used, and let W; be 1 if product i is produced in Factory 1 and 0 if it is produced in Factory 2. In a regression of Y on X, it is advisable to: O a. Exclude W; as products are randomly assigned and including W; would increase standard errors O b. Exclude Wi as it is uncorrelated with X O C. Include W; as E(u | X) # 0, but E(X; | W;) = 0 O d. Include W; as E(u¡ | X¡) # 0, but E(u; | Xi, W;) = E(u¡ | W)

QUESTION 1 Suppose a manufacturing firm has two factories (Factory 1 and Factory 2), and a single production process (Process A) that is used in both factories. A new process (Process B) is developed that potentially reduces production costs. To test whether Process B is less costly than Process A, an experiment is designed where: 1. Within each Factory, products are assigned randomly to Process A or Process B. 2. Production costs for each product are recorded. Note that resources (i.e. materials, workers, equipment) are not reassigned across factories. Let Y be the cost of producing product i, let X; be 1 if Process B is used to produce i and 0 if Process A is used, and let W; be 1 if product i is produced in Factory 1 and 0 if it is produced in Factory 2. In a regression of Y on X, it is advisable to: O a. Exclude W; as products are randomly assigned and including W; would increase standard errors O b. Exclude Wi as it is uncorrelated with X O C. Include W; as E(u | X) # 0, but E(X; | W;) = 0 O d. Include W; as E(u¡ | X¡) # 0, but E(u; | Xi, W;) = E(u¡ | W)

Managerial Economics: A Problem Solving Approach

5th Edition

ISBN:9781337106665

Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Chapter17: Making Decisions With Uncertainty

Section: Chapter Questions

Problem 17.3IP

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