MB0042

Summer 2011- May drive

Masters of Business Administration- MBA Semester 1 MB0042 – Managerial Economics - 4 Credits (Book ID: B1131) Assignment Set- 1 (60 Marks) Note: Each question carries 10 Marks. Answer all the questions. Q1. Explain what is price elasticity of demand and outline the determinants of price elasticity of demand with examples. Answer: Elasticity of Demand Earlier we have discussed the law of demand and its determinants. It tells us only the direction of change in price and quantity demanded. But it does not specify how much more is purchased when price falls or how much less is bought when price rises. In order to understand the quantitative changes or rate of changes in price and demand, we have to study the concept of elasticity of demand. Meaning and Definition The term elasticity is borrowed from physics. It shows the reaction of one variable with respect to a change in other variables on which it is dependent. Elasticity is an index of reaction. In economics the term elasticity refers to a ratio of the relative changes in two quantities. It measures the responsiveness of one variable to the changes in another variable. Elasticity of demand is generally defined as the responsiveness or sensitiveness of demand to a given change in the price of a commodity. It refers to the capacity of demand either to stretch or shrink to a given change in price. Elasticity of demand indicates a ratio of relative changes in two quantities.ie, price and demand. According to prof. Boulding. “Elasticity of demand measures the responsiveness of demand to changes in price” 1 In the words of Marshall,” The elasticity (or responsiveness) of demand in a market is great or small according to the amount demanded much or little for a given fall in price, and diminishes much or little for a given rise in price” 2. Kinds of elasticity of demand Broadly speaking there are five kinds of elasticity of demand. They are Price Elasticity, Income Elasticity, Cross Elasticity, Promotional Elasticity and Substitution Elasticity. We shall discuss each one of them in some detail. Price Elasticity of Demand In the words of Prof. Stonier and Hague, price elasticity of demand is a technical term used by economists to explain the degree of responsiveness of the demand for a product to a change in its price.

For complete assignment visit www.studenthelp.tk Q2. In the newspapers we read about mergers between companies in the same line of business. What are the economies of scale that can be availed of with mergers. Answer: Merger refers to the process of combination of two companies, whereby a new company is formed. An acquisition refers to the process whereby a company simply purchases another company. In this case there is no new company being formed. Benefits of mergers and acquisitions are quite a handful. Mergers and acquisitions generally succeed in generating cost efficiency through the implementation of economies of scale. It may also lead to tax gains and can even lead to a revenue enhancement through market share gain. Economies of Scale The study of economies of scale is associated with large scale production. To-day there is a general tendency to organize production on a large scale basis. Mass production of standardized goods has become the order of the day. Large scale

For complete assignment visit www.studenthelp.tk Q3. Discuss the features of monopolistic competition and the method of price determination in monopolistic competition. Answer: Monopolistic Competition Perfect competition and monopoly are the two extreme forms of market situations, rarely to be found in the real world. Generally, markets are imperfect. A number of attempts have been made by different economists like Piero Shraffa, Hotelling, Zeuthen and others in the early 1920’s, Mrs Joan Robinson and Prof Chamberlin in 1930’s to explain the behavior of imperfect competition. Prof. Chamberlin is the main architect of the theory of Monopolistic Competition. This market exhibits the characteristics of both competition and monopoly. Since modern

For complete assignment visit www.studenthelp.tk Q4. If you were to buy a car, what are the factors that would affect the demand for your purchase. Answer:

Generally speaking, customers would buy more when price falls in accordance with the law of demand. Exceptions to law of demand states that with a fall in price, demand also falls and with a rise in price demand also rises. This can be represented by rising demand curve. In other words, the demand curve slopes upwards from left to right. It is known as an exceptional demand curve or unusual demand curve. For buying a CAR the following factors would affect the demand: Demand for a Car is determined by a number of factors. All such factors are called „demand determinants‟. 1. Price of the Car, prices of other substitutes and/or complements, future expected trend in prices etc.

For complete assignment visit www.studenthelp.tk Q5. When factors of production are combined to produce a particular level of output, what would be the effect on total product when all factors are kept fixed and only one factor is varied. For example, when the amount of land used for producing a particular crop is kept the same, and the other factors of production like labour, fertilisers, etc is increased. Answer: This law of Variable Proportions is one of the most fundamental laws of production. It gives us one of the key insights to the working out of the most ideal combination of factor inputs. All factor inputs are not available in plenty. Hence, in order to expand the output, scarce factors must be kept constant and variable factors are to increased in greater quantities. Additional units of a variable factor on the fixed factors will certainly mean a variation in output. The law of variable proportions or the law of non-proportional output will explain how variation in one factor input give place for variations in outputs.

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Q6. A company wishes to project the production requirements of a particular product in the coming years. How will the company forecast the demand in the coming years, using the trend projection method. Answer: Trend Projection Method An old firm operating in the market for a long period will have the accumulated previous data on either production or sales pertaining to different years. If we arrange them in chronological order, we get what is called „time series‟. It is an ordered sequence of events over a period of time pertaining to certain variables. It shows a series of values of a dependent variable say, sales as it changes from one point of time to another. In short, a time series is a set of observations taken at

specified time, generally at equal intervals. It depicts the historical pattern under normal conditions. This method is not based on any particular theory as to what causes the variables to change but merely assumes that whatever forces contributed to change in the recent past will continue to have the same effect. On the basis of time series, it is possible to project the future sales of a company. Further, the statistics and information with regard to the sales call for further analysis. When we represent the time series in the form of a graph, we get a curve,

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Summer 2011- May drive

Masters of Business Administration- MBA Semester 2 MB0042 – Managerial Economics - 4 Credits (Book ID: B1131) Assignment Set- 2 (60 Marks) Note: Each question carries 10 Marks. Answer all the questions. Q1. The supply of a product depends on the price of the product. This determines the supply curve. What are the factors other than price that cause shifts in the supply curve. Answer: When supply of a product changes only due to a change in the price of that product alone, it is called as either expansion or contraction in supply. Expansion in supply means, more quantity is supplied at a higher price and contraction in supply means, less quantity is supplied at a lower price. This tendency can be represented through a single supply curve. In this case, the seller will be moving either in the upward or downward direction along with the same supply curve. It is clear from the following diagram.

In the diagram, we can notice that when price is Rs. 2.00, 20 units are sold and when the price rises to Rs. 4.00, 40 units are sold (extension). On the other hand, when price falls from Rs. 4.00 to Rs. 2.00 quantity supplied also falls from 40 to 20 units. Supply of a product may change due to changes in other factors. If supply changes not because of changes in price, but because of changes in other determinants,

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Q2. Explain with examples the following types of costs: a) Fixed costs b) Variable costs c) Marginal costs d) average costs e) short run costs Answer: a) Fixed costs are those costs which do not vary with either expansion or contraction in output. They remain constant irrespective of the level of output. They are positive even if there is no production. They are also called as supplementary or

For complete assignment visit www.studenthelp.tk Q3. Indian railways is an example of monopoly in India. Discuss the factors that determine price in the different categories of travel in railways. Answer: Price – Output determination under Monopoly Assumptions a. The monopoly firm aims at maximizing its total profit. b. It is completely free from Govt. controls. c. It charges a single & uniform high price to all customers. It is necessary to note that the price output analysis and equilibrium of the firm and industry is one and the same under monopoly. As output and supply are under the effective control of the monopolist, the market forces of demand and supply do not work freely in the determination of equilibrium price and output in case of the monopoly market. While fixing the price and output, the monopoly firm generally considers the following important aspects. 1. The monopolist can either fix the price of his product or its supply. He cannot fix the price and control the supply simultaneously. He may fix the price of his product and allow supply to be determined by the demand conditions or he may fix the output and leave the price to be determined by the demand conditions. 2. It would be more beneficial to the monopolist to fix the price of the product rather than fixing the supply because it would be difficult to estimate the accurate demand and elasticity of demand for the products. 3. While determining the price, the monopolist has to consider the conditions of demand, cost of the product, possibility of the emergence of substitutes, potential competition, import possibilities, government control policies etc. 4. If the demand for his product is inelastic, he can charge a relatively higher price

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Q4. In the case of consumer durables, we find that when the product is introduced, the prices are high, but over time the prices reduce. What is the pricing policy followed? Answer: Pricing policy refers to the policy of setting the price of the product or products and services by the management after taking into account of various internal and external factors, forces and its own business objectives. In this case the pricing policy followed are Skimming Price Policy And Penetration price policy. a) Skimming Price Policy The system of charging high prices for new products is known as price skimming for the object is to “skim the cream” from the market. A firm would charge a high price initially when it gets a feeling that initially the product will have relatively inelastic demand, when the product life is expected to be short and when there is heavy

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Q5. In the long run, the long run average cost curve is an envelope of the short run cost curves. Discuss the concept behind the same. Answer: The concept behind the same is called Long Run Marginal cost.

A long-run marginal cost curve can be derived from the long-run average cost curve. Just as the SMC is related to the SAC, similarly the LMC is related to the LAC and, therefore, we can derive the LMC directly from the LAC. In the diagram we have taken three plant sizes (for the sake of simplicity) and the corresponding three SAC and SMC curves. The LAC curve is drawn by enveloping the family of SAC curves. The points of tangency between the SAC and the LAC curves indicate different

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Q6. A company wishes to introduce a new flavour of tea in the market. Discuss how the company can forecast demand for the new flavour of tea. Answer: Demand forecasting for new products is quite different from that for established products. Here the firms will not have any past experience or past data for this purpose. An intensive study of the economic and competitive characteristics of the product should be made to make efficient forecasts. Professor Joel Dean, however, has suggested a few guidelines to make forecasting of demand for new products.

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