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Managerial Economics

Managerial Economics

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Published by tps5970
Answers to DMS Course from IIBMS
Answers to DMS Course from IIBMS

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Categories:Types, Business/Law
Published by: tps5970 on Feb 13, 2013
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10/28/2013

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Managerial Economics
 
Case 1
Q1 What are the factors responsible for this excess demand for electricity?
(i)
 
Due to satellite towns like Noida, Ghaziabad, Greater Noida, etc. that are emerging as new industrialhubs; therefore there is growing demand for infrastructure facilities like power, transport, health,education, road, shopping malls, multiplexes, etc. in these cities. These are all factors responsible forexcess of demand for electricity.Secondly, reorganization of UP which could only retain 516 MW of low cost hydel power while thebalance was allocated to Uttaranchal. Hence, due to unavailability of low cost hydel power the demandfor electricity was on rise.
Q2 The demand supply gap is reformed by the government intervention. Explain this phenomenon by a demand supply model.
 
(ii)
 
There is a change in demand due to low or constant supply in favour of the good. This is illustratedgraphically in the figure below. The initial demand curve D1D1 and initial supply curve S1S1determine the equilibrium quantity at Q* & price at P*. Now an increase in demand is manifestedthrough shift of demand curve to the right (from D1D1 to D2D2). This shifts the equilibrium to E1E1,where the new demand curve D2D2 intersects the supply curve S1S1.The equilibrium price rises fromQ* to Q1 and the equilibrium prices increases from P* to P1. Therefore an increase in demand with nochange in supply results in a rise in equilibrium price & quantity.D2 S1Power Generation D1CapacityE26500 MW (P1)E14000 MW (P*)D2D1S14000 6500 11,250 14,200(Q*) (Q1) (Q3) (Q4)
 
Q3 What do you think will happen to the price of electricity?
The cost of electricity will increase due to increase in demand & slow rate of capacity generationCase 2
Q1 Identify the most important factors of production in case of automobile industry. Also attempt toexplain the relative significance of each of these factors.
The most important factors of production in case of Automobile industry are :1.
 
Labour
: Workers employed directly in the car industry; engineers, designers, paint sprayers, testers,management staff, transport & distribution workers etc2.
 
Land
: Natural resources used in manufacturer, land for plant and equipment3.
 
Capital
: Fixed capital: machinery, technology, buildings + Working capital: i.e. stocks of raw materialsand components4.
 
Entrepreneurship
(sometimes seen as a separate factor): management, risk-takerEach one of these factors is extremely important to every business operation. A company must balance theseresources and consider their cost in order for them to stay profitable.1.
 
Natural resources include all items that occur naturally. A few examples of this are land, water, and otherthings that are not man-made. Even the most basic level, all companies must buy land in order to have aplace to do business. Though some companies might not rely directly on natural resources to produce theirproduct, but the products that they buy from other companies are likely to at some point have been derivedfrom natural resources.2.
 
Capital another factor in play a huge role in the formation and expansion of the company. Capital includes
 
things like tools, machines, and other things that a business uses in order to produce their goods or services.At some level, all companies rely on their capital in order to successfully run. Without these things, thecompany would not be able to produce anything. These things can be very expensive, so this can be a hardpart for the owner to finance.3.
 
Yet another factor of production is human resources. Human resources deals with everybody that workswithin the company. All companies need labor in order to function. Everyone from the manual workers, tothe owner of the company falls under the classification of human resources. Without this factor, therewould be no company at all because nobody would be working there.4.
 
The final factor production is entrepreneurship. Entrepreneurs are the people that start their own business,
 
taking all the necessary risks in order to, hopefully, make a profit. Without these people and their ideas, nocompanies would ever start. Starting a business extremely risky, because there is no way to tell if it will beprofitable until after you've tried. However, if you manage the company well and people want your goodsor services, there's a good chance he will be successful in the end. In order to take this risk, entrepreneurmust collect the necessary resources needed to start the company. If he or she does not have naturalresources, capital, and human resources, then there is no way to get the company off the ground. Withoutthese factors, company will never amount to anything more than an idea.
 
 Q2 What more information would you like to obtain in order to draw a production function for MarutiUdyog? Explain with logic
.
The task of a production unit is to organize a production process
 — 
a process of combining the different factors insome proportion so that those inputs can be efficiently transformed into products or outputs.Various terms are used for inputs and outputs.INPUTS OUTPUTSFactors Quantity (
Q
)Factors of production Total Product (
P
)Resources ProductA production function defines the relationship between inputs and the maximum amount that can be producedwithin a given period of time with a given level of technology.Decisions on input and output are taken after considering various technological specifications. The technologicalinformation is summarized in the equation
Q
=
Q
(
 L, N, K.................)
Production Function
states that
Q
is the maximum amount of an output which the firm can produce if it combinesthe inputs (Land
 L
, Labor
 N,
and Capital
K).
The ratio of the factor-combination depends on the form of theestimated production function. The existence of such a function implies that the firm has undertaken on set of optimally calculations whereby they have examined the many alternative ways in which the inputs
 L
,
 N 
and
canbe combined to produce an output in the different technological process available for use in the productive process,and that it is on the basis of these calculations, that it has been found that
Q
is the maximum amount of a givenoutput possible with the given set of inputs (
 L
,
 N, K 
).Mathematically, the production function can also be shown as:
Q
=
 f 
(
 X 
1,
 X 
2 ...............
 X 
k)where
Q
= Output Production Function
 X 
1..............
 X 
k = Inputs used.For purposes of analysis, the equation can be reduced to two inputs
 X 
and
. Restating,
Q
=
 f 
(
 X 
,
)where
Q
= Output
 X 
= Labor
= CapitalTwo special features of a production function are given below:(a) Labour and capital are both inevitable inputs to produce any quantity of goods, and(b) Labour and capital are substitutes to each other in production.Further, The Cobb-Douglas equation is derived asQ = A, K
α
L where K = Capital, Q = Output, L= Labour, A,
α
= positive constants
Properties of Cobb-Douglas Production function
1. This function assumes the returns to scale to be constant.2. If one of the input is zero, output also will be zero.
 
Hence, In the case of Maruti Udyog,Land
: No details has been made available such as location, cost of land etc

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