F-2,Block, Amity Campus Sec-125, Nodia (UP) India 201303
PROGRAM: Masters in Finance and Control SEMESTER-I
Subject Name Economics Study COUNTRY Permanent Enrollment Number (PEN) Roll Number Student Name : Managerial : Botswana : : : Boyce Mangole
INSTRUCTIONS a) Students are required to submit all three assignment sets. ASSIGNMENT DETAILS MARK S 10 10
Assignment A Five Subjective Questions Assignment B Three Subjective Questions +
Case Study Assignment C 45 Objective Questions 10
Total weightage given to these assignments is 30%. OR 30 Marks c) All assignments are to be completed as typed in word/pdf. d) All questions are required to be attempted. e) All the three assignments are to be completed by due dates (specified from time to time) and need to be submitted for evaluation by Amity University. f) The evaluated assignment marks will be made available within six weeks. Thereafter, these will be destroyed at the end of each semester. g) The students have to attached a scan signature in the form.
( √ ) Tick mark in front of the assignments submitted Assignment ‘A’ Assignment ‘B’ Assignment ‘C’
MANAGERIAL ECONOMICS Assignment ‘A’
Q.1. what are indifference curves?
Answer: an indifference curve shows the ordering of preferences by a consumer i.e. it indicates the combination of two products between which the consumer is indifferent, or combination which will yield the same level of satisfaction. Explain the consumers’ equilibrium under the assumptions of ordinal approach. Answer: The consumer is in equilibrium when he maximizes his utility, given his income and the market prices. Two conditions must be fulfilled for the consumer to be in equilibrium. The first condition is that the marginal rate of substitution be equal to the ratio of commodity prices. This is necessary but not sufficient condition.
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MRS x ,y =
The second condition is that the indifference curve be convex to the origin. This condition is fulfilled by the axiom of diminishing marginal rate of substitution of x for y and vice versa.
Examine the concept and relationship of Total, Average and marginal costs with
the help of suitable diagram. Answer: Total cost is the total expenditure incurred on the production. It connotes both explicit and implicit money expenditure and includes fixed and variable costs.
C = f X,T,P f ,K Where
Prices of factors Pf = Fixed factors
TC = TFC + TVC
Total Cost Curves
Average cost is obtained by dividing the total cost by the total output. TC AC = ffffffffff Q
Average cost further can be categorized as average fixed cost (AFC) and average variable cost (AVC).
TFC AFC = fffffffffffffff Q
TVC AVC = fffffffffffffff Q
Average cost curves
Marginal Cost Marginal cost is the change in the total cost for producing an extra unit of output. MC = ∂TC/∂Q Marginal Cost Curve
Q.3. Differentiate and elaborate the concepts of returns to scale and law of variable proportions.
Answer: Laws of Returns to Scale In the long run expansion of output may be achieved by varying all factors by the same proportion or by different proportions. The laws of returns to scale refer to the effects of scale relationship. Three types of returns to scale are observed. • • • Constant returns to scale Increasing returns to scale Decreasing returns to scale
Constant returns to scale If the quantity of all inputs used in the production is increased by a given proportion and we have output increased in the same proportion; it is termed as constant returns to scale.
Increasing returns to scale If output increases by a greater proportion in comparison to a change in the scale of inputs it is termed as increasing Returns to Scale. The causes of increasing returns to scale are: • • • • Specialization of labor Inventory Economies Managerial indivisibilities Technical indivisibilities
Diminishing Returns to Scale If output increases by a smaller proportion in comparison to the change in the scale of inputs, it is described as diminishing returns to scale. The reasons of diminishing returns to scale are: • • • • Managerial inefficiency Exhaustible natural resources Increased bureaucratic Labor inefficiency
Pressure on inputs market due to increasing demand Pressure on inputs prices due to bulk purchase
However this differs from the law of variable propotions in that in this one if one of the factors of production are (usually capital K) is fixed after a certain range of production additional output (i.e. marginal product ) starts to diminish. It is also known as the law of diminishing returns. The range of output over which the marginal products of the factors are positive but diminishing is considered as equilibrium range of output. The range of increasing returns to a factor and the range of negative productivity are not suitable for equilibrium. Three stages of production Stage 1 Capital is underutilized and Successive units of L add greater Amounts to TP Stage 2 Addition to TP due to increase in L continues to be positive but is falling with each unit Stage 3 Fixed Input capacity is reached and additional
Q.4. Why is demand forecasting essential? What are the possible consequences if a large scale firm places its product in the market without having estimated the demand for its product? Answer: demand forecasting is essential due to the following: • • • • • •
Better planning and allocation of resources Appropriate production scheduling Inventory control Determining appropriate pricing policies Setting s les targets and establishing controls and incentives. Planning a new unit or expanding existing one Planning long term financial requirements Planning Human Resource Development strategies
There are two possible consequences when a firm places its products on the market without having estimated the demand for its product
1) The buyers may ignore the product as a result of the fact that it is abundant in the market therefore its demand is relatively lower and hence reduces or make no profit for the firm
2) It may be a new product which every one in the market what’s to use it and in
that sense there would be more demand for that product which would boost the returns of the firm. 5) Discuss the various steps involved in a managerial decision making process. Explain, in detail, any two group decision making techniques. The first step in the decision-making process is identifying the problem. Problem identification is probably the most critical art of the decision making process, for it is what determines the direction that the decision making process takes, and, ultimately, the decision that is made. The second step in decision-making process is generating alternative solutions to the problem. This step involves identifying items or activities that could reduce or eliminate the difference between the actual situation and the desired situation. For this step to be effective, the decision makers must allot enough time to generate creative alternatives as well as ensure that all individuals involved in the process exercise patience and tolerance of others and their ideas. In the Pursuit of “quick fix” managers too often shortchange this step by failing to consider more than one or two alternatives, which reduces the opportunity to identify effective solutions. After generating a list of alternatives, the arduous task of evaluating each of them begins. Numerous methods exist for evaluating the alternatives, including determining the pros and cons of each; performing a cost-benefit analysis for each alternative; and weighting factors important in the decision, ranking each alternative relative to its ability to meet each factor, and then multiplying cumulatively to provide a final value for each alternative. Selecting the Best AlternativeAfter the decision-makers have evaluated all the alternatives, it is time for the fourth step in the decision-making process;
choosing the best alternative. Depending on the evaluation method used, the selection process can be fairly straightforward. The best alternative could be the one with the most "pros" and the fewest "cons"; the one with the greatest benefits and the lowest costs; or the one with the highest cumulative value, if using weighting.
Implementing the Decision This is the step in the decision making process that transforms the selected alternative from an abstract situation into reality. Implementing the decision involves planning and executing the actions that must take place so that the selected alternative can actually solve the problem. Evaluating the Decision In evaluating the decision, the sixth and final step in the decision-making process, managers gather information to determine the effectiveness of their decision. Has original problem identified in the first step been resolved? If not, is the company closer to the situation it desired than it was at the beginning of the decision-making process? Group Decision Techniques Brainstorming is a technique in which group members spontaneously suggest keys to solve a problem. Its primary purpose is to generate a multitude of creative alternatives, regardless of the likelihood of their being implemented. Nominal Group Technique The Nominal Group Technique involves, the use of highly structured meeting agenda and restricts discussion or interpersonal communication during the decision making process. While the group members are all physically present, they are required to operate independently.
Assignment ‘B’ Q.1. Why a firm is price taker and not a price maker under perfect market conditions? Answer:
Q.2. Profit maximization is theoretically the most sound but practically unattainable objective of business firms. In the light of this statement critically appraise the Baumol’s sales revenue maximization theory as an alternative objective of the firm. Answer: Profit maximization is theoretically the most sound but practically unattainable objective of business firms Baumol’s Sales Revenue Maximisation Theory states that: • • • Manager’s rewards are more closely linked to Sales rather than Profits. Firms aim to maximize Sales Revenue, but subject to a Profit Constraint. Profit constraint is exogenously determined by the demand and expectations of the shareholders, banks and other financial institutions.
A Sales Revenue Maximizing firm, in general, produces a greater output than a Profit Maximizing Firm and sells at a price lower than the profit maximizer.
The maximum sales revenue will be where e = 1 (and hence MR = 0) and will be earned only if the profit constraint is not operative.
If the profit constraint is operative the sales revenue maximize will operate in the area where price elasticity is greater than unity.
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= = =
Profit Maximizing Output Sales Maximizing Output Constrained Sales Maximizing Output
1) Distinguish between skimming price and penetration price policy. Which of these policies is relevant in pricing a new product under different competitive conditions in the market? Answer: Skimming pricing is the strategy of establishing a high initial price for a product with a view to “skimming the cream off the market” at the upper end of the demand curve. It is accompanied by heavy expenditure on promotion. A skimming strategy may be recommended when the nature of demand is uncertain, when a company has expended large sums of money on research and development for a new product, when the competition is expected to develop and market a similar product in the near future, or when the product is so innovative that the market is expected to mature very slowly. Under these circumstances, a skimming strategy has several advantages. At the top of the demand curve, price elasticity is low. Besides, in the absence of any close substitute, cross-elasticity is also low. These factors, along with heavy emphasis on promotion, tend to help the product make significant inroads into the market. The high price also helps
segment the market. Only non price-conscious customers will buy a new product during its initial stage. Later on, the mass market can be tapped by lowering the price. If there are doubts about the shape of the demand curve for a given product and the initial price is found to be too high, price may be slashed. However, it is very difficult to start low and then raise the price. Raising a low price may annoy potential customers, and anticipated drops in price may retard demand at a particular price. For a financially weak company, a skimming strategy may provide immediate relief. This model depends on selling enough units at the higher price to cover promotion and development costs. Where as Penetration pricing is the strategy of entering the market with a low initial price so that a greater share of the market can be captured. The penetration strategy is used when an elite market does not exist and demand seems to be elastic over the entire demand curve, even during early stages of product introduction. High price elasticity of demand is probably the most important reason for adopting a penetration strategy. The penetration strategy is also used to discourage competitors from entering the market. When competitors seem to be encroaching on a market, an attempt is made to lure them away by means of penetration pricing, which yields lower margins. A competitor’s costs play a decisive role in this pricing strategy because a cost advantage over the existing manufacturer might persuade another firm to enter the market, regardless of how low the margin of the former may be. One may also turn to a penetration strategy with a view to achieving economies of scale. Savings in production costs alone may not be an important factor in setting low prices because, in the absence of price elasticity, it is difficult to generate sufficient sales. Finally, before adopting penetration pricing, one must make sure that the product fits the lifestyles of the mass market. For example, although it might not be difficult for people to accept imitation milk, cereals made from petroleum products would probably have difficulty in becoming popular. How low the penetration price should be differs from case to case.
1 A 2 B 3 B 4 A 5 C 6 A 7 C 8 D 9 D 10 B 11 B 12 D 13 B 14 A 15 B 16 C 17 A 18 B 19 C 20 B
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C D B D B D D C D D B B A B D A A A A A