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Managerial Economics Questions and Answers PDF
Managerial Economics Questions and Answers PDF
3. What are the basic economical concepts? Briefly explain with the applications.
Ans: The basic/fundamental economic concepts are:
i. Incremental concept
ii. Discounting concept
iii. Time perspective
iv. Opportunity cost
v. Equimarginal concept
Incremental analysis refers to changes in cost and revenue due to a policy change. For
example - adding a new business, buying new inputs, processing products, etc. Change in
output due to change in process, product or investment is considered as incremental
change. Incremental principle states that a decision is profitable if revenue increases more
than costs; and if costs reduce more than revenues.
Application: This concept is used while making a policy decision like adding a new
business, buying new inputs, processing products etc.
According to Discounting concept, if a decision affects costs and revenues in long-run,
all those costs and revenues must be discounted to present values before valid
comparison of alternatives is possible. This is essential because a rupee worth of money
at a future date is not worth a rupee today. Money actually has time value. Discounting
can be defined as a process used to transform/reduce future money into an equivalent
number of present money. For instance, Rs.100 invested today at 10% interest is
equivalent to Rs.110 next year.
FV = PV*(1+r) t
Where, FV is the future value (time at some future time), PV is the present value, r is the
discount (interest) rate, and t is the time between the future value and present value.
According Time perspective, a manger/decision maker should give due emphasis, both to
Short-term and Long-term impact of his decisions, giving apt significance to the different
time periods before reaching any decision.
According to Opportunity cost principle, a firm can hire a factor of production if and
only if that factor earns a reward in that occupation/job equal or greater than its
opportunity cost. It is also defined as the cost of sacrificed alternatives. For instance, a
person chooses to forgo his present lucrative job which offers him Rs.50000 per month,
and organizes his own business. The opportunity cost is Rs. 50,000.
Equimarginal concept refers to the marginal utility of a product. Marginal Utility is the
utility derived from the additional unit of a commodity consumed. The laws of equi-
marginal utility states that a consumer will reach the stage of equilibrium when the
marginal utilities of various commodities he consumes are equal. Also in resource
allocation to various activities, the marginal product of each resource added is
considered. An optimum resource allocation is said to be achieved when the value of
marginal product of each activity is the same.
Types of firms
BUSINESS
PARTNERSHIP
JOINT-HINDU FAMILY
PUBLIC LIMITED
COMPANIES
PRIVATE LIMITED
COMPANIES
COOPERATIVES
1. Private sector:
The ownership is exclusively in the hands of private individuals.
a. Sole Proprietorship:
Owned and controlled by a single individual. Eg: retail trades, service industries, cottage
and small scale industries.
b. Partnership:
Owned, managed and controlled by more than one person. Profits are shared between
them. It is based on Indian Partnership Act. The minimum number of partners is 2 and the
maximum is 20.
c. Joint Hindu family business:
head of the family manages the business and other members help him. Profits are shared
according to their contribution.
d. Joint stock companies or corporation:
A legal entity with a perpetual succession and a common seal. It is created by law.
Public limited companies
Minimum of seven shareholder and the upper limit is open for any number. It has to
publish Balance sheet and Profit and Loss Account.
Cooperative society
People associated for common interest. Eg: consumer’s cooperative credit societies,
cooperative farming societies, housing cooperatives etc. Basic objective is to provide
maximum service to its members.
2. Public sector companies
They aim for the economic development of the country rather than profits.
Departmental organizations
Eg: Posts and telegraphs, railways, broadcasting and defense undertakings.
Public corporations
These are formed under specific acts of the parliament. eg: LIC, IFC, Indian Airlines etc.
Govt. Company
A company with not less than 50 percent of the share capital is owned by the central or
any state govts.
Eg: Hindustan Machine Tools Ltd., Hindustan steel Ltd. Etc.
3. Joint sector
Participation of both the govt. and the private sector in the business.
Madras Fertilizers Ltd. for example, was established as a joint enterprise in participation
with Amoco Inc. (USA) and National Iranian Oil Co.(Iran). The same foreign companies
were partners in Madras Refineries Ltd too. Maruti Udyog Ltd., is one of the latest cases
where a foreign private corporation has been invited to join hands with the Government.
Goals – are long-term aims that you want to accomplish. Objectives – are concrete
attainments that can be achieved by following a certain number of steps. Goals and
objectives are often used interchangeably, but the main difference comes in their level of
concreteness. Objectives are very concrete, whereas goals are less structured.
Objectives of firms:
1. Profit maximization
2. Maximization of the sales revenue
3. Maximization of firm’s growth rate
4. Maximization of Managers utility function
5. Making satisfactory rate of Profit
Goals of firms:
1. Market share
2. Customer satisfaction
3. ROI(Return on Investment)
4. Technological advancement
5. Long run Survival of the firm
6. Entry-prevention and risk-avoidance
7. Social/ Environmental concerns.