JAIPURIA INSTITUTE OF MANAGEMENT, NOIDA

PGDM
FIRST TRIMESTER (Batch 2018-20)
END TERM EXAMINATIONS, OCTOBER 2018

Course Name Managerial Economics Course Code ECO101

Max. Time 2 hours Max. Marks 40 MM

INSTRUCTIONS: Attempt all questions

1. Ajay works as a sales person earning Rs 5,00,000 annually. He owns a piece of commercial
real estate bringing in Rs 2,00,000 in rent annually. He plans to leave his job and operate a retail
store in his commercial estate. At the end of the first year, he expects total revenues of
Rs10,00,000 and total expenses/costs of Rs 3,00,000 under various heads. What is expected
economic profit from the retail store? What should he choose to do?
[2+2]

2. A company selling veg burgers hires an economist to determine the demand for its product in
a particular locality. After analyzing the past trends of demand, the economist tells the company
that the demand for the firm's burgers is given by the following equation:

Qx = 12,000 – 500Px + 5M + 500Pc

Where Px is the price charged for the burgers, M is average consumer income, and P c is the price
of burgers from competing company. Assume that the initial values of P x, M and Pc are Rs. 50,
Rs. 10,000, and Rs. 60, respectively. Using this information:

A. Determine what effect a price increase would have on total revenues of this company. [2]
B. Assess on basis of income elasticity of demand, how sale of the veg burgers would change
during a period of rising income. [2]
C. Assess on basis of cross price elasticity, the probable impact on sale of veg burgers if the
competing company lowers its price. [2]

3. Following is the data of production and employee size of a two wheeler company with respect
to four years during which the company did not change its plant size. Analyze and interpret the
given data in the context of short run production function. [4]

YEAR PRODUCTION EMPLOYEES OUTPUT/EMPLOYEE/YEAR

2007 1,2127,48 13,819 87.8
2008 1,356,463 13,482 100.6
 2009 1,457,066 12,338 118.1
2010 1,516,876 11,531 131.5

4. A restaurant in Goa is currently employing 10 workers, the only variable input, at a wage rate
of INR 30. The Average Product of labour is 20, the last worker added 2 units to the output and
the total fixed cost is INR 2400. Find out
a. the marginal cost of firm [2]
b. the average variable cost [2]
c. the total output that is being produced by the firm [2]
d. the average total cost [2]
e. Analyze whether the average total cost is increasing, constant or decreasing. [2]

5. Read the caselet given below and answer the questions that follow

Frito Lay Devours Snack Food Business

Once again Frito Lay is chewing up the competition. The announcement that Frito Lay’s
competing company is selling off its snack business highlights the danger of trying to compete
against Frito lay in the salty snack business. This company owns half of the $15 billion salty
snack market in US. “Frito is a Fortress and I would tell everybody else trying to get into the
business, not to try to expand or impinge on Frito’s territory or else they will get crushed” says
Michael Branca, an analyst at Natwest securities. Frito continues to expand its realm.

In fact, competitors say that it is Frito lays tactics with retailers that makes it an
invincible rival. Because many retailers are charging more and more for shelf space- as high as
$40,000 a foot annually in some instances. Many regional competitors are saying that Frito Lay
is paying these retail companies to drive out its competing brands. “Frito lay can afford it but we
can’t” says a regional snack business executive. Moreover, Frito can afford to out promote its
competitors by spending exorbitant amounts on advertisements. The company spent $60 million
on advertisement while the competing brand could spend less than $2 million only.

a. What type of a market structure is represented by the above scenario? Give arguments in
support of your answer. [4]
b. What are the entry barriers raised by Frito lay that are preventing entry of the competing
brands? Mention some other types of entry barriers that are prevalent in different
markets.
[4+4]
c. Sometimes in oligopolistic markets firms can act like a monopolist to maximize industry
profit. Comment on how this can be possible. [4]
 JAIPURIA INSTITUTE OF MANAGEMENT, NOIDA
PGDM
FIRST TRIMESTER (Batch 2018-20)
END TERM EXAMINATIONS, OCTOBER 2018

Course Name Managerial Economics Course Code ECO101

Max. Time 2 hours Max. Marks 40 MM

1. Alka is a talented and business minded girl and plans to run a fast food shop in her vacations.
She expects to generate Rs 500 a day each of the 60 days of this period. However, she lost 5 days
as she had to go outstation to accompany her friend to attend a marriage party. At the marriage
party she proposed to apply henna to 8 of her friends’ cousins at a discounted price of Rs 200 per
person. What is the opportunity cost of not attending to her fast food shop during these five
days? What is the relation between opportunity cost and implicit costs of a business?
[4]

2. Mr. X runs a coffee corner in a colony. Suppose the daily demand function for coffee is Qd =
700 – 10P, and the supply function is Qs = – 200 + 20P. Based on these demand and supply
functions, answer following questions:
A. What is the equilibrium price of coffee? [2]
B. What is the equilibrium quantity of coffee? [2]
C. What will be market outcome if price of coffee is set at Rs. 40 per unit? [2]
D. What will be market outcome if price of coffee is set at Rs. 20 per unit? [2]

3. The objective of a business organization besides others can be any of the two- maximization
of profit or maximization of sales revenue. Mr Rajan is the manager of a prominent apparel
business in the city and the owner of the business stays out of the country most of the times
looking after his overseas business. What do you think Mr Rajan’s goal will be- profit
maximization or sales revenue maximization and why? What cost and revenue conditions should
be fulfilled to achieve each of the two goals?
[6]
4. Albake and Polis are the two bakeries located almost side by side across the street from a
major university. The products of Albake and Polis are somewhat differentiated, yet their
primary means of competition is pricing. Suppose each bakery can choose between only two
prices for its mini pizza: a high price of Rs. 50 and a low price of Rs. 30. Clearly the profit for
each firm at each of the prices depends greatly on the price charged by the other firm. Pay off
matrix is given below:

Polis
High price Low price
High price 50, 25 20, 30
Albake
Low price 60, 5 30, 10

Pay off is profit in Rs. thousand per month.

a. Which firm has dominant strategy? What is that dominant strategy? [2]
b. What will be outcome of above pricing game? [2]
c. Can the firms do better by deciding prices in a cooperative manner? Explain. [2]

5. Read the caselet given below and answer the questions that follow

La Franca is an airlines company and has a monopoly on the route on which it is

operating its flights. The airlines company has a high market power but even though its market
power enables it to manipulate market outcomes in terms of setting prices and output, it can’t get
everything it wants. It would really like to sell say Qm quantity at a price of $ 1,500 each
because that kind of price would fetch it greater profits, but it is constrained to sell that quantity
at a lower price.
La Franca being a monopolist has the ability not only to raise the prices but also to charge
various prices for tickets of the same flight since it knows that its demand curve reflects
combined willingness of individuals to pay. In fact some individuals are ready to pay a higher
price than the market price. This practice is called price discrimination. La Franca finds that
business executives must fly on a certain day and a particular time and make the travel
arrangements on a short notice whereas vacation travelers usually have flexible schedules and
plan their trips much in advance by evaluating all options available for travel. The airlines
manager therefore decides to charge different prices for both set of customers.

a. Why can’t La Franca airlines have full control over the price that it wants to charge for its
services although it has high market power? [4]
b. What are the different degrees of price discrimination? Which degree of price
discrimination is being practiced here? [6]
c. In the case how should the airlines set different prices for these two different set of
customers namely, the business executives and the vacation travelers? How did you
decide? [6]