LOVELY PROFESSIONAL UNIVERSITY HOME WORK NO.

1 School of Commerce and Economics Domain: D11 Name of the faculty member Course Code: ECO515 Course Title: Managerial Economics Class: Section: Batch: 2013 Max. Marks: 30 Date of Allotment: 16-2-2013 Date of Submission: 22-2-2013 S. No 1 Roll No All Objectives of Academic Activity Understanding the subject matter and scope of Managerial economics and various tools and techniques used in effective Decision Making. Topic See Annexure Evaluation Details Each question carries 5 marks

Note: Copied assignments will get zero marks. Date: Remarks by COS-F (Mandatory) Sig. of COS-F with date Remarks by COD-F (Mandatory) Sig. of COD-F with date Sig. of Faculty member

HW ECO 515 (Q1) Managerial Economics helps in decision making in the framework of uncertainty and scarcity of resources. Discuss the statement and elaborate with an example. Answer:
Managerial economics (sometimes referred to as business economics), is a branch of economics that applies microeconomic analysis to decision methods of businesses or other management units. As such, it bridges economic theory and economics in practice. It draws heavily from quantitative techniques such as regression analysis and correlation, Lagrangian calculus (linear). If there is a unifying theme that runs through most of managerial economics it is the attempt to optimize business decisions given the firm's objectives and given constraints imposed by scarcity, for example through the use of operations research and programming. Almost any business decision can be analyzed with managerial economics techniques, but it is most commonly applied to:

Risk analysis - various models are used to quantify risk and asymmetric information and to employ them in decision rules to manage risk. Production analysis - microeconomic techniques are used to analyze production efficiency, optimum factor allocation, costs, and economies of scale and to estimate the firm's cost function. Pricing analysis - microeconomic techniques are used to analyze various pricing decisions including transfer pricing, joint product pricing, price discrimination, price elasticity estimations, and choosing the optimum pricing method.

Capital budgeting - Investment theory is used to examine a firm's capital purchasing decisions. At universities, the subject is taught primarily to advanced undergrads. It is approached as an integration subject. That is, it integrates many concepts from a wide variety of prerequisite courses. In many countries it is possible to read for a degree in Business Economics which often covers managerial economics, financial economics, game theory, business forecasting and industrial economics. Importance of the study of Managerial Economics: Managerial Economics does not give importance to the study of theoretical economic concepts. Its main concern is to apply theories to find solutions to day -today practical problems faced by a firm. The following points indicate the significance of the study of this subject in its right perspective. 1. It gives guidance for identification of key variables in decision making process. 2. It helps the business executives to understand the various intricacies of business and managerial problems and to take right decision at the right time. 3. It provides the necessary conceptual, technical skills, toolbox of analysis and techniques of thinking and other such most modern tools and instruments like elasticity of demand and supply, cost and revenue, income and expenditure, profit and volume of production etc to solve various business problems. 4. It is both a science and an art. In the context of globalization, privatization, liberalization and marketization and a highly competitive dynamic economy, it helps in identifying various business and managerial problems, their causes and consequence, and suggests various policies and programs to overcome them. 5. It helps the business executives to become much more responsive, realistic and competent to face the ever changing challenges in the modern business world. 6. It helps in the optimum use of scarce resources of a firm to maximize its profits. 7. It also helps in achieving other objectives a firm like attaining industry leadership, market share expansion and social responsibilities etc.

8. It helps a firm in forecasting the most important economic variables like demand, supply, cost, revenue, price, sales and profit etc and formulate sound business polices 9. It also helps in understanding the various external factors and forces which affect the decision making of a firm. Thus, it has become a highly useful and practical discipline in recent years to analyze and find solutions to various kinds of problems in a systematic and rational manner. There are mainly two functions of managerial economics. Out of two major managerial functions served by the subject matter under managerial economics are decision making and forward planning: 1. Decision Making:The techniques in this section help you to make the best decisions possible with the information you have available. With these tools you will be able to map out the likely consequences of decisions, work out the importance of individual factors, and choose the best course of action to take. Kinds of Decisions There are several basic kinds of decisions. 1. Decisions whether. This is the yes/no, either/or decision that must be made before we proceed with the selection of an alternative. Should I buy a new TV? Should I travel this summer? Decisions whether are made by weighing reasons pro and con. The PMI technique discussed in the next chapter is ideal for this kind of decision. It is important to be aware of having made a decision whether, since too often we assume that decision making begins with the identification of alternatives, assuming that the decision to choose one has already been made. 2. Decisions which. These decisions involve a choice of one or more alternatives from among a set of possibilities, the choice being based on how well each alternative measures up to a set of predefined criteria. 3. Contingent decisions. These are decisions that have been made but put on hold until some condition is met. 2. Forward Planning:- The term 'planning' implies a consciously directed activity with certain predetermined goals and means to carry them out. It is a deliberate activity. It is a programmed action. Basically planning is concerned with tackling future situations in a systematic manner. Forward planning implies planning in advance for the future. It is associated with deciding the future course of action of a firm. It is prepared on the basis of past and current experience of a firm. It is prepared in the background of uncertain and unpredictable environment and guess work. Future events and happenings cannot be predicted accurately. The success or failure of the future plan depends on a number of factors and forces which are unknown in nature. Much of economic activity is forward looking. Every time we build a new factory, add to the stocks of inputs, trucks, computers or improvements in R&D, our intension is to enhance the future productivity of the firm. Growing firms devote a significant share of their current output to net capital formation to bolster future economic output. A business executive must be sufficiently intelligent enough to think in advance, prepare a sound plan and take all possible precautionary measures to meet all types of challenges of the future business. Hence, forward planning has acquired greater significance in business circles.

Suppose there is a sudden increase in preference for chocolates. But the cost of production rises due to rise in price of milk. Use a demand and supply model, to determine what happens to the equilibrium price and quantity in this case. photocopy

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(Q3)

Discuss two examples how industry utilizes The Law of Diminishing Marginal Utility.
The notion that marginal utilities diminish across the ranges relevant to decision-making is called the "law of diminishing marginal utility" (and is also known as Gossen's First Law). This refers to the utility which one obtains from an increase in the stock of an item that one already had. "The law of diminishing marginal utility is at the heart of the explanation of numerous economic phenomena, including time preference and the value of goods... The law says, first, that the marginal utility of each homogenous unit decreases as the supply of units increases (and vice versa); second, that the marginal utility of a larger-sized unit is greater than the marginal utility of a smaller-sized unit (and vice versa). The first law denotes the law of diminishing marginal utility, the second law the law of increasing total utility."[15] As the rate of commodity acquisition increases, marginal utility decreases. If commodity consumption continues to rise, marginal utility at some point may fall to zero, reaching maximum total utility. Further increase in consumption of units of commodities causes marginal utility to become negative; this signifies dissatisfaction. For example, beyond some point, further doses of antibiotics would kill no pathogens at all, and might even become harmful to the body. it takes a certain amount of food energy to sustain a population, yet beyond a point, more calories cannot be consumed and are simply discarded (or cause disease). Diminishing marginal utility is a macroeconomic concept and in particular is less likely to hold for an individual. For an individual, the marginal utility of a good or service might actually be increasing. For example: bed sheets, which up to some number may only provide warmth, but after that point may be useful to allow one to effect an escape by being tied together into a rope; tickets, for travel or theatre, where a second ticket might allow one to take a date on an otherwise uninteresting outing; dosages of antibiotics, where having too few pills would leave bacteria with greater resistance, but a full supply could effect a cure. the third leg is more useful than the first two when building a chair.

As suggested elsewhere in this article, occasionally one may come across a situation in which marginal utility increases even at a macroeconomic level. For example the provision of a service may only be viable if it accessible to most or all of the population, and the marginal utility of a raw material required to provide such a service will increase at the "tipping point" at which this occurs. This is similar to the position with very large items such as aircraft carriers: the numbers of these items involved are so small that marginal utility is no longer a helpful concept, as there is merely a simple "yes" or "no" decision.

(Q4) Explain the following concepts:1) Economies of Scope 2) Economies of scope are changes in average costs because of changes in the mix of output between two or more
products. This refers to the potential cost savings from joint production even if the products are not directly related to each other. 3) For example a companys management structure, administration systems and marketing departments are capable of carrying out these functions for more than one product. Warehouse facilities may be used to maximum advantage by storing a range of the companys product lines. 4) In the publishing industry, there might be substantial cost savings from using a team of journalists to produce more than one magazine. 5) Further economies of scope occur when there are cost-savings arising from by-products in the production process. An example would be the benefits of heating from energy production having a positive effect on agricultural yields. 6) ppt

2) Learning Curves
A learning curve is a graphical representation of the changing rate of learning (in the average person) for a given activity or tool.

Graphical representation of the common sense principle that more one does something the better one gets at it. Learning curve shows the rate of improvement in performing a task as a function of time, or the rate of change in average cost (in hours or dollars) as a function of cumulative output. Used in resource requirements planning, learning curves are also employed in setting incentive rate schemes based on the statistical findings that as the cumulative output is doubled, the average unit cost declines by a constant percentage. For example, an 80 percent learning curve means the per unit average cumulative cost (in hours or dollars) falls to 80 percent of the previous per unit average cumulative cost as the cumulative output doubles. Learning curves are, however, not universally applicable but show most promise in situations where non-mechanized, repetitive assembly operations predominate and which largely use direct labor. Also called improvement curve, progress curve.

(Q5) What are the various applications of regression analysis in managerial decision making? (Q6) According to recent reports there has been a hike in the prices of petrol and diesel. Though the prices are increasing there has not been a huge fall in demand. Analyze the situations referring to Law of Demand and Elasticity.