Paper insructons:

Real Doors, Inc. sells and manufactures doors. They have two separate facilities, one in California and one in Colorado. In 2015, they switched their production in Colorado to use a synthetic material instead of natural resources for their doors. Owing to a policy change in California that was enacted in 2012, the synthetic material could not be used for doors sold in California. Specifically, the policy required that doors sold or produced in California be made entirely of recycled material. This change inevitably led to an increase in the variable cost and price of doors in California.

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The change in Colorado door production was accompanied by an increase in fixed costs, an increase in production capacity, and a decrease in variable costs. The new, cheaper, synthetic material required more sophisticated equipment, but the new equipment was capable of manufacturing doors much more rapidly. In a bid to convince consumers of the benefits of their new doors, and in hope of utilizing their increased production capacity, the firm started a new marketing campaign. Real Doors, Inc. aggressively marketed their synthetic doors, which they called “Real Fake Doors,” using a series of cable television commercials. The commercials quickly went viral, and Real Fake Doors were selling as quickly as they could be produced. Real Doors, Inc. are now evaluating the success of this project, and they also wish to forecast 2021 sales.

Meanwhile in California, successful lobbying efforts have repealed the 2012 legislation. On January 1, 2021, the policy requiring doors to made from recycled material will be officially repealed. Dependent on your forecasts, Real Doors, Inc. may launch Real Fake Doors in California for 2021.

Excel problem: Using the data provided in the “HW4 Data” excel file, perform the following.

1. Create a graph comparing California and Colorado prices over time.

2. Create a column that calculates net income.

3. Perform a regression with ln(P) as the Y variable and ln(Q) as the X variable. Forecast 2021 prices and net income.

4. a. Create a policy change variable beginning in 2012 in California, and a product change variable beginning in 2015 in Colorado. Create a ln(Trend) variable. Create a fixed effect (FE) variable for the state of California. Perform a regression with ln(P) as the Y variable and ln(Q), Policy Change, Product Change, ln(Trend), and CA FE as your X variables.

4. b. Which variables are statistically significant?

4. c. Forecast 2021 prices and net income for both states (for the case of California, assume they are not changing production practices).

5. Now assume that the change in production in California would double fixed costs, double quantity sold, and reduce variable costs by 10% (apply these changes to the 2021 estimates for these variables). Let the “Product Change” variable have the same effect in California as it did in Colorado. Assume the coefficients of all other variables remain unchanged. What are your new forecasted prices and net income in California?

6. Evaluate the success of Real Fake Doors in Colorado. Suggest whether or not the firm should produce Real Fake Doors in California. Explain your reasoning

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