ASSIGNMENT

NOVEMBER 2020 SEMESTER

SUBJECT CODE :MEC 604

SUBJECT TITLE :MANAGERIAL ECONOMICS

LEVEL :MASTER

STUDENT’S NAME :Sundarason Prasath

STUDENT’S NUMBER :MBA-20-31-486

MATRIC NO. :M60105200216

PROGRAMME :MBA

ACADEMIC FACILITATOR : Mr.Ganeshamoorthy

LEARNING CENTRE :Cambridge College

DECLARATION BY STUDENT
I certify that this assignment is my own work and is in my own words. All sources have been
acknowledged and the content has not been previously submitted for assessment to Asia e
University or elsewhere. I also confirm that I have kept a copy of this assignment.

Signed:S.Prasath

QUESTION 1 

FINANCIAL COST AND ECONOMIC COST

Mr. Rahim is planning to pursue MBA studies. Initial inquiry shows that he will have to pay
USD20,000 as tuition fee, buy books for USD2,000, and pay for transport USD500. The MBA
study programme will extend over 18 months. Mr Rahim is working now with a salary of
USD2,500 per month. Being a full time student, he will have to forego the income from his
present job for the period of study.  

Work out the (a) Financial cost, and (b) the Economic Cost

Financing cost, are monitory costs such as interest, and other monetary charges or levies
involved in any of the project. Economic costs not typical bookkeeping expenses and it is
calculated by taking implicit costs cost into consideration.

a. Mr. Rahim’s Financial Cost

Tuition fee USD 20,000

Books USD 2,000

Transport USD 500

Total Financial cost = USD 22500

b. Economic Cost

Implicit cost USD 2,500 X18 = 45,000

Finance cost USD 22,500

Total Economic Cost = 45000 + 22500

= USD 67,500

QUESTION 2 

PROFIT MAXIMIZATION

A firm has the following revenue and cost functions. 

 TR = 60 Q – Q2 

TC = 12Q2 +30 Q + 30 

Determine the quantity level at which the firm maximizes its total profit. 

TR = 60 Q – Q2 

TC = 12Q2 +30 Q + 30 

Profit maximization = MR= MC

dTR dTC
MR= MC=
dq dq

= 60-2Q = Q+30

60-2Q=Q+30

3Q=60-30

Q=10

Profit maximization quantity is when marginal revenue matches marginal cost. Marginal revenue
is the change in total revenue, and marginal cost is equal to change in total cost – for an extra
output. Therefore profit maximization unit of this firm is 10 units.

QUESTION 3 
Explain the term price elasticity of demand? How is it measured? What factors influence market
demand for products? If the price elasticity is -3 and USD200 is the marginal cost of product X,
what should be the optimal sale price?  

(Hint: apply the mark-up rule) 

[10 Marks] 

Price elasticity of demand (PED) measures the amount of change in the quantity demanded in
response to a change in the price in a particular period of time.

Price Elasticity of demand = percentage Change in Quantity / Percentage Change in Price when
we further explain with an example.

Assume that when powdered milk price increased by 50%, milk powder purchases fell by 25%.
Using the technique above the PED of powdered milk is

(-25%) / (50%) = -0.50

Thereby we can conclude that for each single proportion change in the price of powdered milk,
the quantity of milk powder decreases by half.

Price elasticity is in negative in many circumstances as shown in the above example except for
luxury products like latest iPhones and rolls Royce, the demand increases when the price rises as
they are bought to maintain the prestige.

The factors that affect the market demand for a product

Nature of the commodity –luxury or necessary Postponement of consumption

Availability of substitutes Number of uses

Level of income Share in total expenditure

Level of price Time period

If the price elasticity is -3

MC
P=
(1+1/e)

P=200 / (1+1/-3)

= 200 / (2/3)

=200 X 3/2

=USD 300.
QUESTION 4 

PRICE DISCRIMINATION

What is meant by price discrimination? What are the conditions to make price discrimination
effective? Discuss your answers with examples from the Airline Industry.  

1. Price discrimination is a sales strategy that follows charging customers different prices for a
same product or service offered based on what the vendor thinks they can get the customer to
come to an agreement with

There are three types of price discrimination

First degree

First-degree fee discrimination or perfect rate discrimination applies when the firm costs a
separate rate for each unit paid out. At this circumstance the firm is able to charge the maximum
viable fee for each unit and seize all the consumers’ surplus. This is also known as perfect
discrimination. This is practically rare.

Second degree

Second degree fee discrimination happens when an organization expenses different rates for
different quantities. In practical providing volume discounts on bulk purchases.

Third-degree

Third Degree Price Discrimination includes charging different prices to different submarkets.
These customers can be recognized through specific traits such as age, sex, location, time of use.

There are a few conditions apply while practicing a price discrimination in airline
industry.
For a price discrimination conditions must be met. Price Discrimination becomes important
when an affiliation sells to outstanding consumers at two or more unique prices, which is no
longer relates the cost. For price discrimination the firm should provide a distinct service
compared to competitors, For example, Hotel rooms, airline tickets, and professional choices
should be high-quality. The price discrimination is possible when the costs are not transparent to
consumers, but with the latest technology consumers are well aware of all the available services.
Different segment should have a different elasticity of demand. The firm should have at least a
small degree of monopoly power.

Airline Trips and departure times

Airlines charge appealing prices depending on the season, period of the flight and day of the
week. During the top excursion season, the costs will be more striking because of the reality
request is higher and becomes inelastic.

Number of tickets purchased

Airlines claims that they charge a lower fees for higher buy quantities

Coupons

Airline companies frequently provide discount coupons for regular consumers. These coupons
are usually pretty focused on previous purchase habits.

Age Discounts

A popular way to range the market is with age category, for example,

University, college students get rate reductions in tour and retail this will help the airline to
maintain regular passengers.

Advance seat bookings

Airlines give a scope of procedures to value selective costs for advantages early registration.
These advantages are a method of extricating better prices from the individuals who choose to
pay for extras
Buy one get one free ticket are also provided - the tickets are actually given at a half rate for
newly married couple.

Price discrimination enables airline for profit maximization, to enjoy economies of scale,
maximum utilization of space and infrastructure, could manage the flow of customers, and
ensures the survival.

QUESTION 5

A. LAW OF DIMINISHING RETURNS AND THE SHORT-RUN COST CURVE 

The law of diminishing marginal returns states that as the influence of factors of production
increments while ceteris paribus, the extra yield from the last unit of info weakens. The
conception of production requires the contribution of different variables of production. For
example an ideal product, the growth of foods grown from the ground requires adequate place
where there is the fitting kind with water and daylight; work and hardware to plant, develop and
gather the harvest, just as bundling and individuals or machines to introduce the produce for
sale.  Correspondingly, the creation of a school instruction requires prepared educators and
protocol officers, books and other learning materials, just as structures or potentially other space
to have the education.

Applied to the main illustration of delivering leafy foods, the law of diminishing marginal
returns suggests that expanding the contribution of one factor, for example, land, while holding
the contribution of different components work and apparatus steady, will build the measure of
the leafy foods created however at a lower rate. That is, each extra square meter of land, for fixed
degrees of different elements, will yield a diminishing measure of leafy foods

Applied to the second example, the primary educator or the principal book will add a lot to the
school training administration, however each resulting instructor utilized, without expanding the
accessibility of learning materials, managers and actual space, will just grow the schooling
administration at a diminishing rate.

Diminishing marginal returns are an impact of expanding contribution to the short-run, while at
any rate VC is kept steady, for example labour or capital.

B. ECONOMIES OF SCALE AND THE LONG RUN COST CURVE 

Economies of scale are the benefits and costs associated with the expansion of an entire
enterprise. Economies of scale include the benefits of positive externalities that firms experience
as a result of the growth of an industry or the economy an individual firm.

Due to the influence of internal economies, long-term cost curves are considered 'U' shaped for
most companies. However economies suggest that the average costs will rise in long run due to
negative economies of scale.
In the beginning the long run cost curve will slope downward due to positive economies of scale.

Technological economies are the savings incurred as the industry grows, as a result of the
increasing use of mechanical processes and machinery by large industries. While the processes
can be easily measured, technical savings are very likely.

Purchase savings are obtained when large companies make wholesale purchases and receive
discounts on purchases. In the case of a large supermarket chain, it can buy its fresh fruit in much
larger quantities than a smaller supplier of fruits and vegetables.

Administrative savings can occur when large companies spread administrative and operating
costs across all of their factories, departments, divisions or subsidiaries

Financial savings exist because large businesses can achieve economic savings because they
generally borrow money at a better price than small businesses. This is because they usually have
more valuable assets that can be used as collateral, many new businesses fail due to insufficient
cash flow in their early years.

The long run cost curve would start to slope upwards with the diseconomies of scale in the latter
part of the business. Therefore it is U shaped.

Large companies often suffer from lack of communication because it is difficult to maintain an
efficient flow of information between departments. Time lags in the flow of information can
also cause problems in terms of speed of response to changing market conditions. For example, a
supermarket chain may not respond to changes in taste and fashion than a much smaller "local"
retailer.

Coordination issues also affect large companies with many departments and departments, and
can be much more difficult to coordinate operations than small companies. For example, it is
easier for a small manufacturer to coordinate the activities of a small number of employees than
for a large manufacturer with tens of thousands of employees.

Low employee motivation in large companies is a potential diseconomy of scale that can lead to
reduced productivity when measured by production per employee.
C.NEW ECONOMIES OF GLOBALIZATION

Economic globalization refers to rising dependency of world economies as a result of the

increasing scale of cross-border trade in goods and services, the flow of international capital, and
the widespread and rapid spread of technology. It reflects the ongoing expansion and mutual
integration of market boundaries and is an irreversible trend in worldwide economic growth at
the turn of the millennium. The rapidly increasing importance of information in all types of
production activities and marketing are the two main driving forces of economic globalization.
The fast adaptability globalization of world economies in recent years is largely based on the
rapid development of science and technology, resulting from the fact that market economic
systems are rapidly spreading around the world and based on Has developed to strengthen the
cross-border division of labor, which enters the enterprises of different countries.

The advancement of science and technology has significantly reduced transportation

and communication costs and enabled economic globalization. In addition, the development of a
network-based economy has paved the way for a large group of shadow companies to
delineate the concept of national boundaries and gaps in certain economic activities.

Many countries have gradually lowered their tariff and non-tariff barriers, and more and more

countries are opening their current accounts and capital accounts. Multinational Companies have
become the main carters of economic globalization. The globalization of the financial sector has
become one of the fastest developing and most influential aspects of economic
globalization. The flow of capital from the other side of the border is increasing rapidly.

However, the number of developing countries that have benefited from economic globalization
is fewer than 20. With the exception of donations and bilateral financial aid, most developing
countries have not been able to attract capital.

Economic globalization is also under threat from adverse external factors

in developing countries. In open economic conditions, conflict between external economic
equilibrium and attainment of internal economic equilibrium is a major impediment
to the favorable policies of developing countries, underestimating their ability control the
economy.

QUESTION 6 

Briefly explain how firms compete/set price under 

 a. Perfect competition 

b. oligopoly

A. PERFECT COMPETITION

A market is identified as a perfect competition market when many buyers are available to
buy the product, retailers are in perfect competition, and many sellers are available to sell the
product, with both the seller and the buyer having to make rational decisions about the
product contains all relevant information. And firms can enter and exit the market without
any restrictions.

A perfectly competitive is a price taker because of the stress from competing firms forces
them to accept the equilibrium price present in the market. present in the market. If a
business increases its product price by one percent in a completely competitive market, it will
lose all its sales to its rivals. When a carrot-growing person wants to know what the price of a
carrot is, he should to go to the computer or listen to it on the radio. The market price is
determined only by supply and demand throughout the market and not by the individual
farmer. Furthermore, a perfectly competitive company needs to be a very small player in the
overall market, so that it can increase or decrease production without affecting the total
quantity supplied and the price in the market

A perfectly competitive market is a with assumptions. However, manufacturers in a number

of sectors face many competing companies selling very similar products. In this case, they
often have to act as price takers. In an agricultural market the same crops grown by different
farmers are largely interchangeable. A perfectly competitive company won't sell
below break-even, either. When they can sell anything they want at a higher price, why
should they? Small street food markets and small organic farmers are other examples of
markets that operate near perfectly competitive markets.

B. OLIGOPOLY MARKET
The oligopoly is a market situation is where there is few number of firms, but each firm in the
industry takes into account the reactions of competing firms when formulating pricing policies.
The number of firms in an industry can be two or more than two, but not more than 20. An
oligopoly differs from monopoly and monopolistic competition in that there is a seller in the
monopoly; there are many more in monopolistic competition; and in the oligopoly there are only
a small number of sellers.

If an industry is made up of two large companies, each of which sells similar or homogeneous
products and accounts for half of the total market, each price and output policy will have a
complementary effect on the other, so the two companies are likely to form an alliance.
Companies can accept prices, or divide the entire market, or allocate quotas, or merge into one
entity, or create a monopoly, or try to differentiate their products, or the leader decides, such as
laugh gas and shell gas

Substitutions can cause both companies to compete on price such as Coke and Pepsi. Better
wages, better wishes and better customers drive rival pay firms out of the market and then
establish a monopoly.

If the products of the Duopolists are separated, each firm will monitor the actions of its
competitors. A high quality product with low cost offers exceptional profit. Each firm determines
the price of goods and extends production to suit the demand for the goods in the market.

With product differentiation, oligopoly can raise or lower prices without fear of losing customers
or immediate feedback from competitors. However, intense competition between them can create
conditions for monopolistic competition.

The company’s first option is to increase the price of the product. Companies in the industry are
well aware of the fact that increasing the price of a product will result in more customers losing
to their competitors. In such cases, the top of the demand curve is more elastic than the portion of
the curve below the twist.

The second option for the company is to lower prices. If the price goes down, total sales will
increase, but rival companies will pursue price cuts, so sales will not be able to increase much. If
a rival company cuts prices from scratch, the company that first launched the price cut could hit
hard and sales could fall. Therefore, oligopolies avoid price cuts and try to sell their products at
the prevailing market prices.

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