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ECO404 Managerial Economics Assignment 1 Solution

The Case:
Allah has bestowed Pakistan with large reserves of minerals and gemstones. Gemstones are mostly available in Swat, Dir, Mansehra, Kohistan, and Peshawar District.Gemstones Corporation of Pakistan was established in 1979 to develop the gemstones sector in Pakistan but this corporation was liquidated in 1997. Nowadays a number of groups are functioning in this sector. All Pakistan Commercial Exporters Association of Rough & Unpolished Precious and Semi-Precious Stones (APCEA) is one of them. APCEA buys gemstones from local collectors and then send to wholesalers all over the country. APCEA has the data on the number of gemstones (in thousands) ordered during the past twelve months and wanted to develop forecasting model.You are required to help APCEA in developing forecasting model. Data is given as follows.
Month
Firm’s Actual
Market Share
(A)
Jan-13 25.6
Feb-13 24.7
Mar-13 21.3
Apr-13 13.9
May-13 12.6
Jun-13 18
Jul-13 21.5
Aug-13 22.3
Sep-13 30.7
Oct-13 15
Nov-13 13.8
Dec-13 22.6
Requirement:
A- Use a three period moving average method to forecast the demand in January of 2014. Also calculate the RMSE (Root-mean-square error) for this method. Use the table above.
B- Use a five period moving average method to forecast the demand in January of 2014. Also
calculate the RMSE for this method. Use the table above to carry out your calculations.
C-Compare both the methods and tell which one is good for forecasting?
(Marking scheme: 10+10+5)

Solution:

Part (A): demand forecast by using three period moving averages method:

Months Firm’s actual market share 

(A)

Three quarter moving averages(F) (A-F) (A-F)^2
Jan.13 25.6
Feb.13 24.7
Mar.13 21.3
Apr.13 13.9 23.87 -9.97 99.4009
May.13 12.6 19.97 -7.37 54.3169
Jun.13 18 15.93 2.07 4.2849
Jul.13 21.5 14.83 6.67 44.4889
Aug.13 22.3 17.37 4.93 24.3049
Sep.13 30.7 20.6 10.1 102.01
Oct.13 15 24.83 -9.83 96.6289
Nov.13 13.8 22.67 -8.87 78.6769
Dec.13 22.6 19.83 2.77 7.6729
Jan.14 17.13
Total=            511.7852

2)

art (B): demand forecast by using five period moving average methods:

Months Firm’s actual market share 

(A)

Five quarter moving averages(F) A-F (A-F)^2
Jan.13 25.6
Feb.13 24.7
Mar.13 21.3
Apr.13 13.9
May.13 12.6
Jun.13 18 19.62 -1.62 2.6244
Jul.13 21.5 18.1 3.4 11.56
Aug.13 22.3 17.46 4.84 23.4256
Sep.13 30.7 17.66 13.04 170.0416
Oct.13 15 21.02 -6.02 36.2404
Nov.13 13.8 21.5 -7.7 59.29
Dec.13 22.6 20.66 1.94 3.7636
Jan.14 20.88
TOTAL =     306.9456

 

Calculation of RMSE:

RMSE = 6.6219

3) five quarter moving averages method is better than three quarter moving averages method. because it has smaller RMSE as compared to the three quaerter moving averages RMSE’s.

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