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01 Nature and Scope of Managerial Economics

1) Define Managerial Economics?

Ans: Managerial Economics is the integration of economic principles with business

management practices. It pertains to all economic aspects of managerial decision
making. It deals with the application of economic principles and methodologies to the
decision making process within the firm under given situation.

2) What is Scarcity?

Ans: In economics, scarcity is defined as a condition of limited resources and

unlimited wants and needs. In other words, society does not have sufficient resources
to produce enough to fulfill subjective wants.

3) Explain decision-making?

Ans: Decision making is the process of making selection based on some criteria of
one alternative from two or more alternatives. Decision making is a process of
selection and the aim is to select the best alternative.

4) What are rational expectations?

Ans: Rational expectations in economics means the expectations based on an

understanding of the structure of the economy, and fully using all available
information about the economy.

5) What is Marginalism?

Ans: Microeconomic theories are based on the principles of marginalism where

marginal changes are assumed in the relevant phenomena. Marginal change refers to
the addition of just a single unit more. Thus there are concepts like marginal utility,
marginal cost, marginal revenue etc. The theories thus imply equilibrium conditions
in terms of margin, such as a consumer equating marginal utility for the maximization
of total satisfaction or a producer equating marginal cost with marginal revenue for
maximization of profits etc.

6) Explain Incremental principle?

Ans: The incremental principle refers to the change in total. E.g.: Incremental cost
may be defined as the change in total cost due to a specific decision. Similarly,
incremental revenue is the change in total revenue caused due to a decision. Thus,
when incremental revenue exceeds the incremental cost resulting from a particular
decision it is regarded as profitable.

7) Explain Opportunity Cost?

Ans: The opportunity cost of a decision is the sacrifice of the next best alternative
course of action available.
E.g. A Businessman invests his own capital in a business, its opportunity cost can be
measured in terms of the interest he could have earned by lending that money to

8) What is marginal Utility?

Ans: Marginal utility refers to that kind of utility which measures the additional
benefit derived from the consumption of an additional unit of the commodity
purchased. The law of demand is based on the law of diminishing utility; it implies
that by increasing the stock of a commodity its marginal utility is diminished.

9) State Discounting Principle?

Ans: The Concept of discounting is based on the simple principle that a rupee today is
worth more than a rupee tomorrow. Hence whenever the present value of a business
is to be known, the future values will have to be discounted.
Discounting principle can be stated as “If a decision affects the costs and revenues at
future dates, it is necessary to discount those costs and revenues to present values
before a valid comparison of alternatives is possible.

10) Define Econometrics?

Ans: According to Oscar Lange “Econometrics is the science which deals with the
determination of statistical methods of concrete quantitative laws in economic life”
Econometrics is a discipline combining economic theory, statistical method and
mathematical precision.

11) Explain the concept of time perspective?

Ans: According to economists, there are three time periods, namely

1) Market Period
2) Short run &
3) Long Run
The market period is characterized by fixed supply of output, thus the output
cannot be increased in response to demand.
In the short run, supply can be increased to some extent by increasing the use of
variable factors however fixed inputs cannot be altered in the short run.
In the long run, all factors can be altered to suit the demand and hence all factors
are variable.

12) Define Consumer Surplus?

Ans: The difference between the maximum that consumers would be willing to pay
for a good and what they actually do pay for each unit of the good is called consumer

Consumer Surplus = Total utility from the commodity minus Total utility of money
lost in paying its price.

13) What is indifference curve?

Ans: An indifference curve represents satisfaction of a consumer from two or more

combinations of commodities. It can be drawn from the indifference schedule of the
consumer. It is a device which gives all different combinations of two goods which
give equal level of satisfaction.
The basic properties of indifference curves are:
1) The curve slope downwards from left to right.
2) They are convex to the origin.
3) They can never intersect each other however they need not be parallel too.
4) They should not touch either the X Axis or the Y Axis.
5) The indifference map represents an ordeal measurement of utility.

14) What do you mean by Consumer equilibrium?

Ans: Consumer equilibrium refers to the position of rest or no further movement in
the behavior of a rational consumer under the given conditions. The motive of a
rational consumer is to obtain maximum satisfaction, the consumer is said to be in
equilibrium when he maximizes his total utility.

15) State & explain the law of equi-marginal utility?

Ans: The law of equi marginal utility states that the consumer would distribute his
money income between the goods in such a way that the utility derived from the last
rupee spent on each good is equal.
This law implies that a consumer attains equilibrium when the marginal utility of
money expenditure on each good is the same.
02 Demand

1) What are Giffen goods?

Ans: Giffen goods are those goods on which the consumers spend a large part of their
incomes. Giffen paradox states that the demand for a commodity is strengthened with
raise or weakened with a fall in price. In such case the demand curve slopes upwards
and is an exception to the law of demand.

2) What is Vabelen’s effect?

Ans: Vabelen’s effect states that some consumers measure the utility of a commodity
entirely on the basis of its price i.e. greater the price of the commodity, the greater is
its utility.
E.g. Diamond is considered as prestigious commodity and is used by rich people,
if the price of the demand is high the prestige value is high and the consumer will buy
more of diamonds.

3) What is cross elasticity of demand?

Ans: Cross elasticity of demand is defined as the ratio of the percentage change in
demand for one good (say x) to the percentage change in the price of other good (say
y), given that the price of X remains the same. In case of commodities that are
complimentary, a raise in price of one commodity will lead to a raise in the demand
for the complimentary good; this concept is called cross elasticity of demand.

4) What is derived demand?

Ans: Derived demand refers to the demand for a product liked to the purchase of
some main product. The derived demand arises in case of such commodities and
services that are tied up to some other product.

5) What is autonomous demand?

Ans: Autonomous demand is a demand which is not tied to any other product. E.g.
the demand for food, clothing and shelter is not tied to anything, it is an independent
demand, and consumers directly consume these articles to derive satisfaction.

03 Production Function

1) What is Production Function?

Ans: In micro-economics, a production function is a function that specifies the output of
a firm, an industry, or an entire economy for all combinations of inputs. It is an abstract
way of discussing how the firm gets output from its inputs. It describes, in mathematical
terms, the technology available to the firm.
2) Explain Cobb Douglas Production Function?
Ans: The Cobb Douglas Demand function is the linear homogenous production function.
In this function, the output is the goods produced by the manufacturing industries and the
inputs are labour and capital.
It considers two variable factor inputs and it is widely used to represent the
relationship of output to inputs. This family of functions takes on the form Y=A.L^a.K^b
Y= Output,
L= Labour Input,
K= Capital Input,
A, a & b = Constants determined by technology

04 Market Structure & Product Pricing

1) Define Duopoly?
Ans: A true duopoly is a specific type of oligopoly where only two producers exist in one
market. In reality, this definition is generally used where only two firms have dominant
control over a market.
It is a situation in which two companies own all or nearly all of the market for a given
type of product or service.