Assignment MB0042- Managerial Economics Q1. Discuss profit maximizing model in detail.

Answer- Profit-making is one of the most traditional, basic and major objectives of a firm. Profit-motive is the driving force behind all business activities of a company. It is the primary measure of success or failure of a firm in the market. Profit earning capacity indicates the position, performance and status of a firm in the market. The model is based on the assumption that each firm seeks to maximize its profit given certain technical and market constraints. The following are the main propositions of the model: 1. A firm is a producing unit which converts various inputs into outputs of higher value, by employing certain techniques of production. 2. The basic objective of each firm is to earn maximum profit. 3. A firm operates under given market conditions. 4. A firm selects that alternatives course of action which helps to maximise consistent profits. 5. A firm attempts to change its price, input and output quantity to maximise its profit. Justification for profit maximisation The model for profit maximisation can be justified on account of the following reasons: 1.Basic objective of traditional economic theory The traditional economic theory assumes that a firm is owned and managed by the entrepreneur himself and , the entrepreneur always aims at maximum return on his capital invested in the business. Hence, profit maximisation becomes the natural principal of a firm. 2. Firm in not a charitable institution - A firm is a business unit. It is organised on commercials principles. A firm is not a charitable institution. Hence, it has to earn reasonable amount of profits. 3. Most realistic prediction of price-output behaviour The modal help to predict usual and general behavior of business firms in the real world as it provides a practical guidance. It also helps in predicting the reasonable behavior of a firm with more accuracy. Thus it is a very simple, plain, realistic, pragmatic and most useful hypothesis in forecasting price output behavior of firm. 4. Necessary for survival it is to be noted to the very existence and survival of a firm depends on its capacity to earn maximum profits. It is a time-honoured hypothesis and, there is common

agreement among businessmen to make highest possible profits both in the short run and long run. 5. Achievements of other objectives In recent years, several other objectives have become much more popular and all these objectives have become highly relevant in the context of modern business setup. But it is to be remembered that they can be achieved only when a firm is making maximum profits for e.g., a firm, in the initial stage of its operations, may focus on maximising its market share by lowering its prices and offering attractive entry offers to customers. Similarly, at other point of time, the business firm may take decision to maximise returns over the long run while even compromising on immediate profits, e.g., through mergers and acquisitions. Q2. Discuss the various survey methods to forecast demand. Answer METHODS TO DEMAND FORECASTING

SURVEY METHODS METHODS

SATISTICAL

1. Consumers interview method a) Survey of buyers intentions through questionnaire b) Direct interview method i) Complete Enumeration method ii) Sample survey method 2. Collective opinion method 3. Expert opinion method

1. Trend projection method 2. Economic indicators

Survey method help us in obtaining information about the future purchase plans of potential buyers through collecting the opinions of experts or by interviewing the consumers. These methods are extensively used in short run and for estimating the demand for new products. There are different approaches under survey methods. Consumers interview method Under this method, efforts are made to collect the relevant information directly from the consumers with regard to their future purchase plans. In other to gather information from consumers, a number of alternative techniques are developed from time to time. Among them, the following are some of the important ones: a) Survey of buyers intentions or preference It is one of the oldest methods of demand forecasting. It is also called opinion surveys. Under this method, consumer-buyers are requested to indicate their preference and willingness about particular products. The success of the survey method depends on many factors including: 1. The nature of the question asked 2. The ability of the survey 3. The representatives of the samples 4. Nature of the products 5. Characteristics of the market 6. Consumer-buyers behavior, their intentions, attitudes, thoughts, motives, honesty etc. 7. Techniques of analysis 8. Conclusion drawn, etc b) Direct interview method Experience of the experts shows that it is impossible to approach all customers therefore, careful sampling of representative customers is essential. c) Collective opinion method or opinion survey method This is the variant of the survey method. This method is also known as sales- force polling or opinion poll method. Under this method, sales representatives, professional experts, the market consultants and others are asked to express their considered opinions about the volume of sales expected in the future. d) Delphi method or expert opinion method This method was originally developed at Rand Corporation in the late 1940s by olaf helmer, Dalkey and Gordon. This method was used to predict future technological changes. It has proved more useful and popular in forecasting non-economic rather than economic variables.

e) End use or input output method Under this method, the sale of the product under consideration is projected on the basis of demand surveys of the industries using the given product as an intermediate product may have many end-users demand of the intermediate product used in the production of the final product. Q3. Describe the characteristics of monopolistic competition. Answer- Perfect competition and monopoly are two extreme forms of market situations, rarely to be found in the real world. Generally, markets are imperfect. Prof. Chamberlin is the main architect of the theory of Monopolistic competition. This market exhibits the characteristics of both perfect competition and monopoly. Since modern market are combined and integrated with monopoly power and competitive forces, they are called as Monopolistic competition. It is a market structure in which a large number of small sellers sell differentiated products which are close, but not perfect substitutes for one another. Characteristics of monopolistic competition 1. Existence of a large number of firms Under Monopolistic competition, the number of firms producing a product will be large. The size of each firm is small. No individual firm can influence the market price. Hence, each firm will act independently without worrying about the policies followed by other firms. Each firm follows an independent price-output policy. 2. Market is characterised by imperfections Imperfections may arise due to advertisements, differences in transport cost, irrational preferences of products, etc., Seller may also have inadequate knowledge about market and prices existing at different segments of markets. 3. Free entry and exit of firms Each firm produces a very close substitute for the existing brands of a product. Thus, differentiation provides ample opportunity for a firm to enter with the group or an industry. On the contrary, if the firm faces the problem of product obsolescence, it may be forced to go out of the industry. 4. Element of monopoly and competition Every firm enjoys some sort of monopoly power over the product it produces. However, it is neither absolute nor complete because each product faces competition from rival seller selling different brands of the product.

5. Similar product but not identical Under monopolistic competition, the firm produces commodities which are similar to one another but not identical or homogenous. For example, toothpastes, blades, cigarettes, shoes, etc., 6. Non-price competition In this market, there will be competition among Minimonoplists for their product and not for the price of the product. Thus, there is product competition rather than price competition. 7. Definite preference of the consumers Consumer will have definite preference for particular variety or brands loyalty owing to the special features of a product produced by a particular firm. 8. Product differentiation The most outstanding features of monopolistic competition is product differtiation. Firm adopt different techniques to differentiate their products from one another.

Q4. Explain the price elasticity of demand and also its applications. Answer The term elasticity is borrowed from physics. it shows the reaction of one variable with respect to the change in the 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 other variable. Elasticity of demand is generally defined as the responsiveness or sensitiveness of demand to a given change in the price or non-price determinant of a commodity. For e.g., demand for a good/service changes by some percentage due to change in consumer income by some percentage, measurement of these changes can lead to calculation of elasticity of demand. Elasticity of demand indicates a ratio of relative change in two quantities, i.e., price and demand. Price elasticity of demand In the other word 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 change its price. Percentage change in quality demanded Ep = Percentage change in price

Where, Ep is price elasticity. 1. Perfectly elasticity demand In this case, a very small change in price lead to an infinite change in demand. The demand curve is a horizontal line and parallel to OX axis. The numerical co-efficient of perfectly elasticity demand in infinity (ED= ). 2. Perfectly inelastic demand in case of any change in price, the quantity demand will be perfectly constant. The demand curve is a vertical straight line and parallel to OY axis. 3. Relatively elastic demand Here, if there is a small in price, then it lead to proportional change in demand. 4. Relatively inelastic demand Here a huge change in price, say 8% fall price, lead to less than proportional change in demand, say 4% rise in demand. 5. Unitary elastic demand Here there is proportionate change in price which leads to equal proportional change in demand. Application of price elasticity of demand 1. Production planning- It help a producer to decide about the volume of production. If the demand for his products is inelastic, specific quantities can be produced while he has to produce different quantities, if the demand is elastic. 2. Help in fixing the price of different goods- It help a producer to fix a price of his good. If the demand for his product is inelastic, he can fix a higher price and if the demand is elastic, he has to charge a lower price. 3. Helps in determining the foreign exchange rates Exchange rates refers to rate at which currency of one country is converted in to the currency of another country. 4. Help in fixing the rewards for factors inputs Factor rewards refers to the price paid for their service in the production process .it helps the producer to determine the reward for factor of production. If the demand for any factor unit is inelastic, the producer has to pay higher reward for it and vice-versa. 5. Help in determining in term of trade it is the basis for deciding the terms of trade between to nations. The term of trade implies the rate at which the domestic goods are exchanged for foreign goods. 6. Help in fixing the rate of taxes Taxes refers to the compulsory payment made by a citizen to the government periodically without expecting any direct return benefit from it. 7. Helps in declaration of public utilities Public utilities are those institutions which provide certain essential goods to the general public at economical prices. The government may declare a particular industry as public utility nationalise it, if the demands for its products is inelastic. 8. Poverty in midst of plenty The concept explains the paradox of poverty in the midst of plenty. A bumper crop of rice or wheat, instead of bringing prosperity to farmers, may actually bring poverty to them because the demand for rice and wheat is inelastic. Q5. Explain the factor determining elasticity of supply.

Answer The factor determining elasticity of supply are as follows: 1. Time period Time has a great influence on elasticity of supply than on demand. Generally, supply tends to be inelastic in the short run because time available to organise and adjust supply to demand would be insufficient. Supply would be more elastic in the long run. 2. Availability and mobility of factors of production When factors of production are available in plenty and freely mobile from one occupation to another, supply tends to be elastic and vice-versa. 3. Technological improvements Modern method of production expand output and hence supply tens to be elastic. Old methods reduce output and supply tends to be inelastic. 4. Cost of production If cost of production rises rapidly as output expands, and then there will not be much incentive to increase in cost. Hence, supply tends to be inelastic and vice-versa. 5. Kinds and nature of market If the seller is selling his or her products in different market, supply tends to be elastic in any one of the market because, a fall in the price in one market will induce him or her to sell in another market. 6. Political condition Political condition may disrupt production of a product. In that case, supply tends to become inelastic. 7. Numbers of seller Supply tends to become more elastic if there are more sellers freely selling their products and vice-versa. 8. Price of related goods A firm can charge a higher charge for its products, if price of other products are higher and vice-versa. 9. Goals of the firm if the seller is happy with small output, supply tends to be inelastic and vice-versa.

Q6. Discuss any two laws of returns to scale with example. Answer- Law of returns The law of returns operates in the short period. It explains the production behavior of the firm with one factor variable while other factors are kept constant. Whereas the law of returns to scale operates in the long period. It explains the production behavior of the firm with all variable factors. (1) Increasing Returns to Scale: If the output of a firm increases more than in proportion to an equal percentage increase in all inputs, the production is said to exhibit increasing returns to scale.

For example, if the amount of inputs are doubled and the output increases by more than double, it is said to be an increasing returns returns to scale. When there is an increase in the scale of production, it leads to lower average cost per unit produced as the firm enjoys economies of scale.

(2) Diminishing Returns to Scale: The term 'diminishing' returns to scale refers to scale where output increases in a smaller proportion than the increase in all inputs. For example, if a firm increases inputs by 100% but the output decreases by less than 100%, the firm is said to exhibit decreasing returns to scale. In case of decreasing returns to scale, the firm faces diseconomies of scale. The firm's scale of production leads to higher average cost per unit produced.

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