Determine the labour and capital production elasticities and give an economic interpretation of each value

Test whether the coefficients of capital and labour are statistically significant


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On completion of this assignment, you should be able to:

1.Apply economic concepts to real-world economic phenomenon, and

2.Evaluate cases which require advanced economic knowledge.



Fiza Coffee Sdn Bhd (FCSB) has hired you as an economic consultant to assess the potential of profitably entering the Malaysian market for gourmet coffee. FCSB would like you to make your recommendations on what are the most important factors in order to successfully penetrate the market. The firm also instructs you that in addition to the production of the coffee itself, it is also interested in opening several distribution or sales points. They would like your recommendation on the factors that would be most beneficial to determining the correct location and size for the outlet.

You are required to write a detailed action plan on how you would proceed with this job.



Economists at the Wilson Company are interested in developing a production function for fertilizer plants (taken from McGuigan, 2005). They have collected data on 15 different plants that produce fertilizer as shown in the table below :

Farm                    Production                            Capital                                Labour

1                              606                                         18891                                    700

2                              566                                         19201                                    652

3                              647                                         20655                                    823

4                              524                                         15082                                    650

5                              712                                         20300                                    859

6                              488                                         16079                                    613

7                              762                                         24194                                    851

8                              443                                         11504                                    655

9                              821                                         25970                                    901

10                           398                                         10127                                    550

11                           897                                         25622                                    842

12                           359                                         12477                                    541

13                           979                                         24002                                    949

14                           332                                         8042                                       576

15                           1065                                       23972                                    926


You are required to do the following:

a.Estimate the Cobb-Douglas production function Q = aLαKβ where Q = output; L = labour input; K = capital input; and a, α, and β are the parameters to be estimated. (Note: If the regression program on your computer does not have a logarithmic transformation, manually transform the preceding data into the logarithms before entering the data into the computer.)

b.Test whether the coefficients of capital and labour are statistically significant. Explain your answers.

c.Determine the percentage of the variation in output that is “explained” by the regression equation. Explain your answer.

d.Determine the labour and capital production elasticities and give an economic interpretation of each value.



Read the following case and answer the questions at the end of the case.


How Airlines Cut Costs

IN THE 1980s a cabin crew at American Airlines observed that its passengers would happily wolf down in-flight dinner salads, but nearly three-fourths would leave the customary olive. Robert Crandall, the company’s boss at the time, promptly removed it. It turned out that the airline paid its caterers based on the number of ingredients in the salad: 60 cents for four items and 80 cents for five. The olive was the fifth item. This move saved more than $40,000 a year. In 1994 Southwest Airlines followed the suggestion of a flight attendant and removed the company’s logo from rubbish bags, saving the carrier $300,000 a year in printing costs. In an industry that serves fussy customers and operates on thin margins, how else do modern airlines cut costs without cutting corners?


They start by mimicking doughnut-dodging supermodels who watch their weight down to the second decimal place. Airlines bin bulky in-flight magazines, lay thinner carpets and serve food in light cardboard boxes. Some airlines have jettisoned safety equipment for emergency water landings on those aircraft that do not fly above water. Seats have become lighter. In its Airbus A321, Air Mediterranée, a French carrier, recently replaced 220 economy seats, each weighing 12kg, with skinnier ones made from lighter materials such as titanium that weigh around 4kg. GoAir, an Indian low-cost carrier, hires only female flight attendants because they are on average 10-15 kg lighter than men. Such parsimony pays off. Fuel accounts for a third of an airline’s costs and every kilogramme thus shed removes $100 from an aircraft’s annual fuel bill.


Small design tweaks on modern aircraft, which are not as thirsty as their predecessors, also help. Southwest Airlines estimates that it saves 54m gallons of fuel a year after having installed winglets, or upturned wingtips, on its fleet to reduce drag. EasyJet, a budget carrier, uses special paint that eliminates microscopic bumps on the aircraft’s body to help it cut through air more easily and, the airline claims, burn less fuel. Internationally, pilots are being persuaded not take off at full throttle and to get their aircraft to cruising altitude (where the air is thinner and there is less drag) immediately. When landing on long runways, pilots may let the aircraft slow down on its own instead of putting the engines into reverse thrust. Some low-cost carriers like India’s SpiceJet have learned to work their fleet aggressively. Pilots of its Bombardier Q400 turboprops, which serve smaller cities, fly their planes faster to shave a few minutes of flight-time off each leg, which lets the airline squeeze in an additional flight every day. The increased fuel burn at higher speeds is more than paid for by the additional revenue from the extra flight.

And yet for all the stress that airlines willingly take on, boarding delays cost them up to $1 billion a year in Europe alone. Airbus thinks it has the answer. It has been granted a patent for a portable cabin that copies the seating arrangement of an aircraft. The module, docked at a gate, is loaded with passengers and their luggage and is then slotted into an empty aircraft like a matchbox that neatly slips into its case. The plane then flies to its destination; after landing the detachable cabin is removed and replaced by another module containing a new set of passengers ready for take-off. The futuristic design seems likely to cost billions of dollars and many years to develop—and it may never get off the ground. In the meantime, airlines will continue to weed out that extra olive.


You are required to answer the following questions:

a.Sustainable competitive advantage may arise from product differentiation strategy, from focused cost or cost leadership strategy or from information technology strategy.

i.Discuss the three different strategies above. Provide real examples.

ii.Based on the above case, identify the strategy adopted by the various airlines mentioned. Support your answers.


b.Find as much information as you can about Malaysian Airlines System (MAS) to help you analyse the strategy adopted by MAS to sustain its competitive advantage.

i.Is the strategy working?

ii.If you are in-charge of charting the future of MAS, what would you do?



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