TSTA602 Assignment 2 May 11, 2020 Instructions. This assignment has a total of 30 marks and worth...

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TSTA602 Assignment 2 May 11, 2020 Instructions. This assignment has a total of 30 marks and worth 30% of the final grade of TSTA602. The detailed marks allocation are provided at the beginning of each question. You are encouraged to discuss the assignment with your peers, but must write down your own solution. This assignment is due at 5pm on Friday of Week 11 (12th June, XXXXXXXXXXPlease submit your assignment on Moodle before the deadline. Scenario. You, as a property investor, are interested in understanding which factor (or factors) drives the prices of investment properties. A dataset is collected which contains the prices (in thousand dollars, as denoted by apart price) for 50 onebedroom apartments in city X, their corresponding rents per week (in dollars, as denoted by rent) and the costs to hold each of these properties per week (in dollars, as denoted by cost of property). Following the procedures below to analyse the dataset ’assign2 data.csv’ by using Rstudio. Please only include relevant outputs from Rstudio in your solution and attach the R codes as appendice. (a). (2 marks) Import the data into Rstudio, draw two scatter plots: apart price versus rent and apart price versus cost. (b). (4 marks) Fit the following two linear models: Model 1: apart price = b0 + b1 × rent Model 2: apart price = c0 + c1 × cost Write down the equations of the two models with correct coefficients. (c). (4 marks) Comment on the significance of all coefficients obtained from (b) based on the p-values (from the outputs of Rtudio). The significance level is XXXXXXXXXXd). (6 marks) Produce residual plots for each model in (b), comment on each plot. (e). (4 marks) Produce normal qq plots for each model in (b), and comment on each plot. (f). (3 marks) Fit the following linear model: Model 3: apart price = d0 + d1rent + d2cost Write down the equation of the model with correct coefficients. 1 (g). (3 marks) Comment on the significance of all coefficients obtained from (f) based on the p-values (from the outputs of Rtudio). The significance level is XXXXXXXXXXh). (2 marks) Compare Model 1 and Model 3, explain which one is better. (i). (2 marks) Given rent = 810 and cost = 800, predict the prices under Model 1 and Model 3. 2

Neenisha · Accepted Answer

Question 1
A. Profit Maximization Strategy for Perfectly Competitive Firm
Perfectly Competitive Market is the market where all the firms produce homogeneous products. 
The characteristics of the perfectly competitive market are as follows:
· There are large number of firms in the perfectly competitive market
· The firms are the price taker as they cannot influence the price of the product, because none of them have enough control over the price.
· The products produced are homogeneous products
· There are little or no barriers to entry
· There is full Information symmetry in the market
The main objective of the business is to maximize the profit. In case of perfectly competitive firm, the firm maximizes the profit when Marginal Cost is equal to Marginal Revenue.
Revenue / cost
Output 
0
M1
M
B
A
MR  = AR
MC
The above graph represents the Profit maximization point under perfectly competitive market. 
The condition for profit maximization is when MC = MR (Marginal Cost = Marginal Revenue).
However, we see that MC = MR at two points A and B. But the profit maximization point is B. The reason behind this is that at point A, MC = MR, but after that MC curve goes down implying that Marginal Revenue is more than Marginal cost, which means that firm would have an incentive to produce more than OM output as it will earn more marginal revenue. However, firm will stop producing at point B, because after point B, Marginal cost of producing one more unit is more than the Marginal Revenue earned by that product. Thus, profit maximizing point is Point B where MC = MR = AR and MC crosses MR from below. The optimal output is OM1.
B. Profit Maximization Point 
a. Profit maximization level of output at a price of $ 2.50
Marginal Revenue = MR = AR
Profit Maximization Point (A)
	
From the above figure,

TSTA602 Assignment 2 May 11, 2020 Instructions. This assignment has a total of 30 marks and worth 30% of the final grade of TSTA602. The detailed marks allocation are provided at the beginning of each...

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