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mb0042

mb0042

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Managerial Economics (MB0042)Q.1 Income elasticity of demand has various applications. Explain each application withthe help of an example.
Ans- 1. Helps in determining the rate of growth of the firm.If the growth rate of the economy and income growth of the people is reasonably forecasted,in that case it is possible to predict expected increase in the sales of a firm and vice-versa.2. Helps in the demand forecasting of a firm.It can be used in estimating future demand provided the rate of increase in income and Ey for the products are known. Thus, it helps in demand forecasting activities of a firm.3. Helps in production planning and marketingThe knowledge of Ey is essential for production planning, formulating marketing strategy,deciding advertising expenditure and nature of distribution channel etc in the long run.4. Helps in ensuring stability in productionProper estimation of different degrees of income elasticity of demand for different types of  products helps in avoiding over-production or under production of a firm. One should alsoknow whether rise or fall in income is permanent or temporary.5. Helps in estimating construction of housesThe rate of growth in incomes of the people also helps in housing programs in a country.Thus, it helps a lot in managerial decisions of a firm.
Q.2 When is the opinion survey method used and what is the effectiveness of themethod.Ans---
 
Collective opinion method or opinion survey method
This is a 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 andthe market consultants and others are asked to express their considered opinions about thevolume of sales expected in the future. The logic and reasoning behind the method is thatthese salesmen and other people connected with the sales department are directly involved inthe marketing and selling of the products in different regions. Salesmen, being very close tothe customers, will be in a position to know and feel the customer’s reactions towards the product. They can study the pulse of the people and identify the specific views of thecustomers. These people are quite capable of estimating the likely demand for the productswith the help of their intimate and friendly contact with the customers and their personal judgments based on the past experience. Thus, they provide approximate, if not accurateestimates. Then, the views of all salesmen are aggregated to get the overall probable demandfor a product.Further, these opinions or estimates collected from the various experts are considered,consolidated and reviewed by the top executives to eliminate the bias or optimism and pessimism of different salesmen. These revised estimates are further examined in the light of 
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factors like proposed change in selling prices, product designs and advertisement programs,expected changes in the degree of competition, income distribution, population etc. The finalsales forecast would emerge after these factors have been taken into account. This methodheavily depends on the collective wisdom of salesmen, departmental heads and the topexecutives.It is simple, less expensive and useful for short run forecasting particularly in case of new products. The main drawback is that it is subjective and depends on the intelligence andawareness of the salesmen. It cannot be relied upon for long term business planning.
Q.3 Show how price is determined by the forces of demand and supply, by using forcesof equilibrium.Ans
-- price is determined in the industry through the interaction of the forces of demand andsupply. This price is given to the firm. Hence, the firm is a price taker and not price maker.On the basis of this price, a firm adjusts its output depending on the cost conditions.An industry under perfect competition in the short run, reaches the position of equilibriumwhen the following conditions are fulfilled:1. There is no scope for either expansion or contraction of the output in the entire industry.This is possible when all firms in the industry are producing an equilibrium level of output atwhich MR = MC. In brief, the total output remains constant in the short run at the equilibrium point. Thus a firm in the short run has only temporary equilibrium.2. There is no scope for the new firms to enter the industry or existing firms to leave theindustry.3. Short run demand should be equal to short run supply. The price so determined is called as‘subnormal price’. Normal price is determined only in the long run. Hence, short run price isnot a stable price.Equilibrium of the competitive firm in the short runA competitive firm will reach equilibrium position at the point where short run MR equalsMC. At this point equilibrium output and price is determined.The firm in the short run will have only temporary equilibrium. The short run equilibrium price is not a stable price. It is also called as sub – normal price. 
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The competitive firm, in the short run, will not be in a position to cover its fixed costs. But itmust recover short run variable costs for its survival and to continue in the industry. A firmwill not produce any output unless the price is at least equal to the minimum AVC. If shortrun price is just equal to AVC, it will not cover fixed costs and hence, there will be losses.But it will continue in the industry with the hope that it will recover the fixed costs in thefuture. If price is above the AVC and below the AC, it is called as “Loss minimization” zone. If the price is lower than AVC, the firm is compelled to stop production altogether.While analyzing short term equilibrium output and price, apart from making reference toSMC and AVC, we have to look into AC also. If AC = price, there will be normal profits. If AC is greater than price, there will be losses and if AC is lower than price, then there will besuper normal profits.In the short run, a competitive firm can be in equilibrium at various points E1, E2 and E3depending upon cost conditions and market price. At these various unstable equilibrium points, though MR = MC, the firm will be earning either super normal profits or incurringlosses or earning normal profits.
Q.4 Distinguish between fixed cost and variable cost using an example.
Ans-- Fixed costs are those costs which do not vary with either expansion or contraction inoutput. 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 over head costs.On the other hand, variable costs are those costs which directly and proportionately increaseor decrease with the level of output produced. They are also called as prime costs or directcosts.
Q.5 Discuss Marris Growth Maximization model and show how it is different from theSales maximization model.
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