JAIPUR NATIONAL UNIVERSITY, JAIPUR

School of Distance Education & Learning

Internal Assignment No. 1

Master of Business Administration / DM

Paper Code: MBA – 103

Paper Title: Managerial Economics

Last date of submission: Max. Marks: 15

Note : Question No. 1 is of short answer type and is compulsory for all the students.
It carries 5 Marks. (Word limits 50-100)

Q. 1. Answer all the questions:

(i) Distinguish between perfectly elastic demand and perfectly inelastic demand
Ans: Perfectly Inelastic Demand: When demand is perfectly inelastic, quantity
demanded for a good does not change in response to a change in price. ... Perfectly
Elastic Demand: When the demand for a good is perfectly elastic, any increase in the
price will cause the demand to drop to zero.

(ii) Define marginal revenue.

Ans Marginal revenue - defi niti on

Marginal revenue is the additional income generated from the sale of one more unit of a good or service.
It can be calculated by comparing the total revenue generated from a given number of sales (e.g. 11 units),
and the total revenue generated from selling one extra unit (i.e. 12 units).
Example:

Output Total revenue (£) Marginal revenue (£)

10 500
11 700 200
12 800 100

(iii) What is opportunity cost?

Ans Opportunity cost refers to what you have to give up to buy what you want in terms of other
goods or services. When economists use the word “cost,” we usually mean opportunity cost.

The word “cost” is commonly used in daily speech or in the news. For example, “cost” may refer
to many possible ways of evaluating the costs of buying something or using a service. Friends or
newscasters often say “It cost me $150 to buy the iPhone I wanted.”

(iv) What is product differentiation?

Ans Definition: Product differentiation is a process used by businesses to distinguish a product or service
from other similar ones available in the market. The goal of this tactic is to help businesses develop a

competitive advantage and define compelling unique selling propositions (USPs) which set their product

apart from competitors. Organizations with multiple products in their portfolio may use differentiation to

separate their various products from one another and prevent cannibalization.

(v) What do you understand by disposable income?

Ans: Definition: Disposable income, sometimes called disposable personal income (DPI),
is the total earnings a household makes that are available to save or spend after taxes
have been paid. In other words, it’s a household’s take home pay after taxes and other
employee deductions have been taken out of their paychecks.
Note: Answer any two questions. Each question carries 5 marks (Word limit 500)

Q. 2. What is elasticity of demand? Explain different types & degrees of elasticity of

demand.

Meaning of Elasticity of Demand:

Demand extends or contracts respectively with a fall or rise in price. This
quality of demand by virtue of which it changes (increases or decreases)
when price changes (decreases or increases) is called Elasticity of Demand.

“The elasticity (or responsiveness) of demand in a market is great or small

according as the amount demanded increases much or little for a given fall
in price, and diminishes much or little for a given rise in price”. – Dr.
Marshall.
Types of Elasticity:
Infinite or Perfect Elasticity of Demand

Perfectly Inelastic Demand:

Very Elastic Demand:

Less Elastic Demand:

Q. 3. Explain law of variable proportion with help of suitable diagrams.

Ans: the behaviour of the law of variable proportions or of the short-run production function
when one factor is constant and the other variable, can also be explained in terms of the
isoquant analysis. Suppose capital is a fixed factor and labour is a variable factor In Figure. 10.
OA and OB are the ridge lines and it is in between them that economically feasible units of
labour and capital can be employed to produce 100, 200, 300, 400 and 500 units of output. It
implies that in these portions of the isoquants, the marginal product of labour and capital is
positive.

Q. 4. Define national income. Discuss the methods measuring National Income with
suitable example.

Ans:
According to Marshall: “The labour and capital of a country acting on its natural
resources produce annually a certain net aggregate of commodities, material and
immaterial including services of all kinds. This is the true net annual income or revenue
of the country or national dividend.” In this definition, the word ‘net’ refers to
deductions from the gross national income in respect of depreciation and wearing out of
machines. And to this, must be added income from abroad.

or example, a peasant sells wheat worth Rs.2000 to a flour mill which sells wheat flour

to the wholesaler and the wholesaler sells it to the retailer who, in turn, sells it to the

customers. If each time, this wheat or its flour is taken into consideration, it will work

out to Rs.8000, whereas, in actuality, there is only an increase of Rs.2000 in the national

income.

Third, it is again not possible to have a correct estimation of national income because

many of the commodities produced are not marketed and the producer either keeps the

produce for self-consumption or exchanges it for other commodities. It generally

happens in an agriculture- oriented country like India. Thus the volume of national

income is underestimated
JAIPUR NATIONAL UNIVERSITY, JAIPUR
School of Distance Education & Learning
Internal Assignment No. 2

Master of Business Administration / DM

Paper Code: MBA – 103

Paper Title: Managerial Economics

Last date of submission: Max. Marks: 15

Note : Question No. 1 is of short answer type and is compulsory for all the students.
It carries 5 Marks. (Word limits 50-100)

Q. 1. Answer all the questions:

(i) “Two indifference curves cannot touch or intersect each other”. Explain why?
The indifference curves cannot intersect each other. It is because at the point of
tangency, the higher curve will give as much as of the two commodities as is given by
the lower indifference curve. This is absurd and impossible

(ii) What is elasticity of substitution?

Responsiveness of the buyers of a good or service to the price changes in its substitutes. It
is measured as the ratio of proportionate change in the relative demand for two goods to the
proportionate change in their relative prices. Elasticity of substitution shows to what degree
two goods or services can be substitutes for one another. See also elasticity of technical
substitution.
(iii) Explain any one good effect of Monopoly.

Ans Monopolies are generally considered to have several

disadvantages (higher price, fewer incentives to be efficient e.t.c).
However, monopolies can also give benefits, such as – economies of
scale, (lower average costs) and a greater ability to fund research and
development. In certain circumstances, the advantages of monopolies can
outweigh their costs.

ADD PICTURE
(iv) What is homogeneity of product?
Ans : A homogeneous product is one that cannot be distinguished from
competing products from different suppliers. In other words, the product has
essentially the same physical characteristics and quality as similar products from other
suppliers. One product can easily be substituted for the other.
(v) Name the stages of business cycle.
Ans: The term “business cycle” (or economic cycle or boom-bust cycle) refers to
economy-wide fluctuations in production, trade, and general economic activity. From a
conceptual perspective, the business cycle is the upward and downward movements of
levels of GDP (gross domestic product) and refers to the period of expansions and
contractions in the level of economic activities (business fluctuations) around a long-term
growth trend.

Note: Answer any two questions. Each question carries 5 marks (Word limits 500)

Q. 2. Explain the law of diminishing marginal utility. What is its importance?

Ans: The Law of Diminishing Marginal Utility Explained

In other words, the law of diminishing marginal utility postulates that when
consumers go to market to purchase a commodity, they do not attach
equal importance to all the commodities they buy. They will pay more for some
commodities and less for others
This law is of great importance in economics:

1. Basis of Economic Laws:

The Law of Diminishing Marginal Utility is the basic law of consumption. The Law of

Demand, the Law of Equi-marginal Utility, and the Concept of Consumer’s Surplus are

based on it.

2. Diversification in Consumption and Production:

The changes in design, pattern and packing of commodities very often brought about by

producers are in keeping with this law. We know that the use of the same good makes us

feel bored; its utility diminishes in our estimation. We want variety in soaps,

toothpastes, pens, etc. Thus, this law helps in bringing variety in consumption and

production.

3. Value Theory:

The law helps to explain the phenomenon in value theory that the price of a commodity
falls when its supply increases. It is because with the increase in the stock of a
commodity, its marginal utility diminishes.

4. Diamond-Water Paradox:

The famous “diamond-water paradox” of Smith can be explained with the help of this

law. Because of their relative scarcity, diamonds possess high marginal utility and so a

high price. Since water is relatively abundant, it possesses low marginal utility and hence

low price even though its total utility is high. That is why water has low price as

compared to a diamond though it is more useful than the latter.

Q. 3. Explain different determinants of demand.

Ans: The determinants of demand are factors that cause fluctuations in the economic
demand for a product or a service. A shift in the demand curve occurs when the curve
moves from D to D₁, which can lead to a change in the quantity demanded and the
price. There are six determinants of demand.
These six factors are not the same as a movement along the demand curve, which is
affected by price or quantity demanded. A shift can be an increase in demand, moves
towards the right or upwards, while a decrease in demand is a shift downwards or to
the left.
In the diagram below, we see an increase in Demand. This results in the demand curve
shifting from D1 to D2. This shift can occur because of any of the determinants of
demand mentioned below

Because of this demand shift, we see an increase in quantity demanded from Q1 to

Q2 and an increase in price from P1 to P2.

An increase or decrease in any of these factors affecting demand will result in a shift
in the demand curve. Depending on whether it is an inward or outward shift, there
will be a change in the quantity demanded and price.

1. Normal Goods
When there is an increase in the consumer’s income, there will be an increase in
demand for a good. If the consumer’s income falls, then, there will be a fall in demand.

. Change in Preferences
If there is a change in preferences, then there will be a change in demand.
For example, yoga became mainstream a couple of years ago, and health enthusiasts
promoted its benefits. This trend led to an increase in demand for yoga classes.
3. Complimentary Goods
When there is a decrease in the price of compliments, then the demand for its
compliments will increase. Complementary goods are goods you usually buy together,
like bread and butter, tea and milk. If the price of one goes up, the demand for the
other good will fall. For example, if the price of yoga classes fell, then there would be
an increase in demand for yoga mats.

4. Substitutes
An increase in the price of substitutes will affect the demand curve. Substitutes are
goods that can consumers buy in place of the other like how Coca-Cola & Pepsi are
very close substitutes. If the price of one goes up, the demand for the other will rise.
For example, if meditation classes became more expensive, then there would be an
increase in demand for yoga classes.

5. Market Size
If the size of the market increases, like if a country’s population increases or there is
an increase in the number of people in a certain age group, then the demand for
products would increase. Simply put, the higher the number of buyers, the higher the
quantity demanded. For example, if the birth rate suddenly skyrocketed, then there
would be an increase in demand for baby products.

6. Price Expectations
When there is an expectation of a price change, this means that people expect the
price of a good to increase shortly. These people are then more likely to purchase
sooner, which would increase demand for the product. For example, if people are
expecting the price of a laptop to fall, then they will delay their purchase until the
price lowers.

Q. 4. Define national income. Explain the relationship between national income &
economic welfare.

“The range of our enquiry becomes restricted to that part of social (general) welfare that can be
brought directly or indirectly into relation with the measuring rod of money.” Welfare is a state of
the mind which reflects human happiness and satisfaction.

On the contrary, non-economic welfare is that part of social welfare which cannot be
measured in money, for instance moral welfare. But it is not proper to differentiate between
economic and non-economic welfare on the basis of money. Pigou also accepts it. According to
him, non-economic welfare can be improved upon in two ways.

(1) By the income earning method. Longer hours of working and unfavourable conditions will
affect economic welfare adversely.

(2) By the income spending method. It is assumed in economic welfare that expenditures
incurred on different consumption goods provide the same amount of satisfaction.

Relation Between Economic Welfare and National Income

The effect of national income can be studied in two ways.

1. Change in the size of National Income

2. Changes in Distribution of National Income

Changes in the Size of National Income

The change in the size of national income may be given positive or negative. The positive
change in the national income increases its volume. Consequently, people consume more of
goods and services. Which lead to increase in the economic welfare, whilst the negative change
in national income results in reduction of its volume.

1. Changes in Prices

If the change in national income is due to change in prices, it will be difficult to

measure the real changes in economic welfare. For instance, when the national income
increases as a result of increase in prices, the increase in economic welfare is not
possible for the reason that it is possible that the productivity of goods and services may
not have increased. It is more likely that the economic welfare would decline as a result
of increase in prices. It is only the real income in national income that increases
economic welfare.

2. Working Conditions

It depends on the manner in which the increase in national income comes about. The
economic welfare cannot be said to have increased, if the increase in national income is
due to explanation of labour, for instance, hike in production by labourers for longer
hours by paying them lesser wages than the minimum. Influencing to put their women
and kids to work by not providing them with facilities of transport to and from the
factories and residence, and that their residence in slums.

3. Per Capita Income

National income cannot be a reliable index of economic welfare, if per capita income is
not kept in mind. It is possible that with the hike in national income, the population may
increase at the same pace and thus the per capita income may not increase at all. In
such a condition, the hike in national income will not result in hike in fiscal welfare and
vice versa.
4. Method of Spending

The influence of hike in national income on fiscal welfare depends also on the method
of spending adopted by the people. If with the increase in income people spend on such
necessities and facilities as milk, butter, eggs etc. which hikes efficacy, the economic
welfare will increase. But otherwise, the outlay in consuming alcohol, speculating etc. will
decrease the economic welfare. Hence the increase and decrease of fiscal welfare
depends on changes in the tastes of people.