Managerial Economics Questions and Answers

Class Test Questions and Answers 1. What is Managerial Economics? What is its relevance to Engineers/Managers? Ans: Study of economic theories, logic and methodology for solving the practical problems of business. It is used to analyze business problems for rational business decisions. It is also called as Business Economics or Economics for firms. Relevance to engineers/Managers: Engineering and Management involves a lot of strategic decision making situations. Managerial economics helps in rational decision making. The various economic concepts help a manger to take right decisions. The scope of managerial economics is: I. The selection of the production or the service to be produced. II. The choice of production methods and resource combinations III. The choice of best price and quantity combinations IV. Promotional strategy and activities. V. The selection of location from which to produce. 2. How will you arrive at a business decision? What is a business environment? Ans: Managerial Decisions/ Decision Analysis is the Process of selecting the best out of alternative opportunities, open to the firm. To arrive at a business decision, the four main phases are: 1. Determine and define the objective. 2. Collection of information regarding economic, social, political and technological environment and foreseeing the necessity and occasion for decision. 3. Inventing, developing and analyzing possible courses of action. 4. Selecting a particular course of action from the available alternatives. Business environment comprises of the economic, social, political and technological environment. 3. What are the basic economical concepts? Briefly explain with the applications. Ans: The basic/fundamental economic concepts are: i. Incremental concept ii. Discounting concept iii. Time perspective iv. Opportunity cost v. Equimarginal concept Incremental analysis refers to changes in cost and revenue due to a policy change. For example - adding a new business, buying new inputs, processing products, etc. Change in output due to change in process, product or investment is considered as incremental change. Incremental principle states that a decision is profitable if revenue increases more than costs; and if costs reduce more than revenues. Application: This concept is used while making a policy decision like adding a new business, buying new inputs, processing products etc.

According to Discounting concept, if a decision affects costs and revenues in long-run, all those costs and revenues must be discounted to present values before valid comparison of alternatives is possible. This is essential because a rupee worth of money at a future date is not worth a rupee today. Money actually has time value. Discounting can be defined as a process used to transform/reduce future money into an equivalent number of present money. For instance, Rs.100 invested today at 10% interest is equivalent to Rs.110 next year. FV = PV*(1+r) t Where, FV is the future value (time at some future time), PV is the present value, r is the discount (interest) rate, and t is the time between the future value and present value. Application: This concept is used in investment decisions, loan transactions, selection of projects etc. According Time perspective, a manger/decision maker should give due emphasis, both to Short-term and Long-term impact of his decisions, giving apt significance to the different time periods before reaching any decision. Application: Pricing decisions. According to Opportunity cost principle, a firm can hire a factor of production if and only if that factor earns a reward in that occupation/job equal or greater than its opportunity cost. It is also defined as the cost of sacrificed alternatives. For instance, a person chooses to forgo his present lucrative job which offers him Rs.50000 per month, and organizes his own business. The opportunity cost is Rs. 50,000. Application: Choice between alternative projects, Investment decisions. Equimarginal concept refers to the marginal utility of a product. Marginal Utility is the utility derived from the additional unit of a commodity consumed. The laws of equimarginal utility states that a consumer will reach the stage of equilibrium when the marginal utilities of various commodities he consumes are equal. Also in resource allocation to various activities, the marginal product of each resource added is considered. An optimum resource allocation is said to be achieved when the value of marginal product of each activity is the same. Application: Resource allocation.

4. What are firms? Mention the Types, Objectives and goals of firms. Firm is an organization owned by one or jointly by a few or many people, engaged in a productive activity, with a definite aim. Types of firms BUSINESS

PRIVATE SECTOR

INDIVIDUAL OWNERSHIP

JOINT SECTOR

COLLECTIVE OWNERSHIP

PUBLIC SECTOR

DEPARTMENTAL ORGANIZATIONS

STATUTORY CORPORATIONS

GOVT. COMPANIES

PARTNERSHIP

JOINT-HINDU FAMILY

JOINT STOCK COMPANIES

PUBLIC LIMITED COMPANIES

PRIVATE LIMITED COMPANIES

COOPERATIVES

1. Private sector: The ownership is exclusively in the hands of private individuals. a. Sole Proprietorship: Owned and controlled by a single individual. Eg: retail trades, service industries, cottage and small scale industries. b. Partnership:

Owned, managed and controlled by more than one person. Profits are shared between them. It is based on Indian Partnership Act. The minimum number of partners is 2 and the maximum is 20. c. Joint Hindu family business: head of the family manages the business and other members help him. Profits are shared according to their contribution. d. Joint stock companies or corporation: A legal entity with a perpetual succession and a common seal. It is created by law. Public limited companies Minimum of seven shareholder and the upper limit is open for any number. It has to publish Balance sheet and Profit and Loss Account. Cooperative society People associated for common interest. Eg: consumer’s cooperative credit societies, cooperative farming societies, housing cooperatives etc. Basic objective is to provide maximum service to its members. 2. Public sector companies They aim for the economic development of the country rather than profits. Departmental organizations Eg: Posts and telegraphs, railways, broadcasting and defense undertakings. Public corporations These are formed under specific acts of the parliament. eg: LIC, IFC, Indian Airlines etc. Govt. Company A company with not less than 50 percent of the share capital is owned by the central or any state govts. Eg: Hindustan Machine Tools Ltd., Hindustan steel Ltd. Etc. 3. Joint sector Participation of both the govt. and the private sector in the business. Madras Fertilizers Ltd. for example, was established as a joint enterprise in participation with Amoco Inc. (USA) and National Iranian Oil Co.(Iran). The same foreign companies were partners in Madras Refineries Ltd too. Maruti Udyog Ltd., is one of the latest cases where a foreign private corporation has been invited to join hands with the Government. Definition of Goals and Objectives Goals – are long-term aims that you want to accomplish. Objectives – are concrete attainments that can be achieved by following a certain number of steps. Goals and objectives are often used interchangeably, but the main difference comes in their level of concreteness. Objectives are very concrete, whereas goals are less structured. Objectives of firms: 1. Profit maximization 2. Maximization of the sales revenue 3. Maximization of firm’s growth rate 4. Maximization of Managers utility function 5. Making satisfactory rate of Profit

Goals of firms: 1. 2. 3. 4. 5. 6. 7.

Market share Customer satisfaction ROI(Return on Investment) Technological advancement Long run Survival of the firm Entry-prevention and risk-avoidance Social/ Environmental concerns.