Assignment1-Managerial Economics

Question 1. Answer:
Law of Diminishing marginal Utility:
Utility is the satisfaction one achieves by consumption of a good or service, bigger the basket of
consumption higher the utility.
Marginal utility is achieved by consumption of one additional unit of good or service, Marginal utility
keeps decreasing with each successive unit of consumption other things remaining constant, this is
called law of diminishing marginal utility.

Marginal utility curve

negative

Example when we eat same chocolate, after the 5th one we shall loose interest and will not buy the
same chocolate after that as we feel no value addition eating the same chocolate, this is called law of
diminishing marginal utility.
To counter the law of diminishing marginal utility, the companies change the colour,package,design
and advertisement for their product.
Yamaha launched mini super bike R15 in 2008, with colour option Red, black and Blue, then again in
2009 they added the colour yellow with graphics stickers.
In 2009 they introduced muffler kit, engine kit and body kit to make the bike more stylish.
1n 2010 they released version 1, R15 V1 with change in tyre size, seating position and graphics
stickers.
In 2011 they released version 2, R15 V2 with increased seat height from 790mm to 800mm and the
single seat was spilt to double seat sharper taillight with LED.
2011 to 2017 they were targeting other markets and launched different colours, black with golden
stickers, dual tone white and red, white and blue.
In 2018, they launched version 3, R15 V3, with change in front style,usb port ,ABS and VVA engine
for more power.
In 2021, they launched version 4,R15 V4, with LED head light,dual ABS,R1 digital meter.
All their advertisements will be on the race track explaining the features of the bike.
Thus to avoid diminishing of marginal utility, Yamaha has released same vehicle with same engine,
different versions with change in colour and design to attract the consumers/customers.

Reference: Motor beam website.

Question 2.Answer:
Own price elasticity:
It is a better measure of responsiveness of quantity demanded to a price change as compared to
slope. It is defined as the proportionate change in the quantity demanded to a change in price,
keeping all other demand determinants constant.
Slope = change in quantity / change in price.
Calculated by
Own price elasticity of demand at a point,
Ep = ∆Q/Q = P ∆Q
∆P/P Q ∆P
Ep > -1 then the product is elastic in nature.
The price will reduce with increase in quantity, when the demand curve (DC) will be horizontal in high
elastic condition, the change in price will be almost zero with increase in quantity.
Good example is milk price, the half-liter packet will cost around 30INR, the price will not be lowered
as the increase in quantity.
Similarly oil price, the sesame oil cost around 360INR, the price is constant and doesn’t change in
increase of the quantity.
Ep < -1 then the product is inelastic in nature.

The increase in price won’t affect the quantity, in high inelastic demand curve (DC) the change in
quantity will be almost zero with increase in price, mostly happens in monopoly products.
Good example petrol price, cylinder price the quantity of the consumption doesn’t reduce with
increase in price.
Apple iPhone is also a good example.

Cross price Elasticity:

The Cross Price Elasticity of demand is an economic concept that measures the reaction of the
quantity of a good when the price of the good changes. This measure, also known as the cross-price
elasticity of demand, is calculated by dividing the rate of change in the quantity of one good by the
rate of change in the price of the other good.

Example:
The change in price of diesel will affect the diesel car quantity sales, as there is no major difference in
the petrol and diesel prices, the sale of the diesel engine car reduces.
The change in price of coke will affect the quantity of Pepsi and thumps up.
Income Elasticity of Demand:
It is a measure of responsiveness of quantity demanded to an income change.
It is defined as proportionate change in the quantity demanded to a change in income, keeping all the
other demand determinants constant.

EI >0 normal goods, EI < 0 inferior goods, as increase income the few products are not bought those
products are called inferior goods.
Example:
The hatch back bought in initial stages and as the income increases, we prefer to buy SUV, the hatch
back becomes inferior at that point of income.
The customer of boat headphone will not buy same boat when he has increase in income, he will
move on to Bose headphone or Apple airpods.

Question 3. Answer:
Demand Determinants:
Demand determinants are factors that cause fluctuations in the economic demand for a product or
service.
The below are the demand determinants to buy a car for me,
Demand Weightag
Why
determinants e
Seating capacity 5 My family is joint family, need 7-seater minimum
Brand 3 I prefer Indian brands but can comprise.
Safety 5 I do long drives, safety disc brakes,ABS,airbags are must.
Fuel economy 5 For long drives mileage is important.
Service station
4
network allover India Flexibility to repair or service
Price 4 It should be affordable by me
Maintenance cost 3 Reasonable maintenance cost
Ground clearance My native town has many cement factories, the speed brakers
4
are steep.

Question 4. Answer:
1. The average cost of rendering the delivery service for the existing players:
The average cost of rendering delivery will reduce, as the new company to the market will
target lesser rendering price, which will affect the average cost of rendering, example the
launch of amazon food delivery charged 10% of the order value when the swiggy and
Zomato charged 22%-25% of order value (reference business line), further swiggy and
Zomato will be reducing their cost of rendering to avoid loss of customers.

2. Price/commissions that they charge from their customers:

The price and commissions will be reduced by the swiggy, as the entry of new company will
share few customers , swiggy will try to match the price of the new company. Example
swiggy charges the packing charge, delivery partner fee and tax , Amazon waived
packaging charges and it charges less then industries average price (reference:business
line).
Now swiggy,Zomato,uber eats,food panda will reduce the price or introduce new schemes
to avoid packing charges or food delivery charges.

3. Profitability:
The profitability of the swiggy will reduce as it has reduced the price to meet the elastic
market demand, swiggy introduced Binge and Bite schemes for unlimited free deliveries
and buy 1 get 1 schemes.

4. How would the break-even point impact due to entry of new firms:

Break even point = fixed cost / sale price-variable cost or fixed cost/ margin

The swiggy must do more delivery or the no of delivery to achieve the break-even point will
be increased.
Their fixed cost is constant and will not change in increase in no of deliveries.
The variable cost will increase with increase in no of deliveries.
As they are introducing schemes and lowering the price, the break even point quantity (no
of delivery) will increase.