ASSIGNMENT

01/2023

NOVEMBER 28

Submitted To: Dr. Tanmay Pant

Submitted by: Himanshu Raj
MBA First Year

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Marginal Utility
Marginal utility refers to the additional satisfaction or benefit a consumer derives from consuming one
more unit of a good or service. It is based on the idea that as a person consumes more of a particular
good or service, the additional satisfaction or utility derived from each additional unit tends to
decrease.

Let's consider the example of eating chocolate bars. Suppose you start with no chocolate bars, and as
you consume them, you experience the following marginal utility:

1. First chocolate bar: The initial chocolate bar provides a high level of satisfaction because you've been
craving chocolate. The marginal utility is high.

2. Second chocolate bar: After eating the first bar, your craving is somewhat satisfied, but you still
enjoy the second chocolate bar. However, the additional satisfaction is less than that of the first bar,
so the marginal utility is lower.

3. Third chocolate bar: By the time you reach the third chocolate bar, you may start to feel full or
experience diminishing returns in terms of satisfaction. The marginal utility is even lower than that of
the second bar.

4. Fourth chocolate bar: At this point, you might be feeling a bit sick, and the enjoyment of eating
another chocolate bar is minimal or even negative. The marginal utility is very low or negative.

This example illustrates the concept of diminishing marginal utility, where the additional satisfaction
or pleasure from each successive unit of consumption tends to decrease. It's a fundamental principle
in economics that helps explain consumer behavior and choices. People allocate their resources
(money) in a way that maximizes their overall satisfaction, taking into account the diminishing marginal
utility of goods and services.

Equi-Marginal Utility
The principle of equi-marginal utility is an economic concept that suggests that a consumer will allocate
their resources in such a way that the marginal utility per rupee (or per unit) is equal for all goods and
services they consume. In other words, a consumer will maximize their total satisfaction or utility by
distributing their budget among different goods and services in such a way that the additional
satisfaction gained from the last unit of each good is the same.

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Here's a simple example to illustrate the concept:

Let's say you have a budget of ₹10 to spend on two goods: Apples and Oranges. The marginal utility is
the additional satisfaction gained from consuming one more unit of a good. If the marginal utility per
rupee spent on apples is greater than the marginal utility per rupee spent on oranges, you would
reallocate your budget until the two are equal.

Suppose the marginal utility for the last rupee spent on apples is 8 utils, and for oranges, it is 6 utils. In
this case, you should reallocate your budget to spend more on apples and less on oranges until the
marginal utility per rupee for both goods is equal. Let's say you reallocate your budget, and now the
marginal utility per rupee for both apples and oranges is 7 utils. At this point, you have achieved
equilibrium or equi-marginal utility.

The principle helps consumers make decisions about how to allocate their limited resources to
maximize their satisfaction or utility. It's important to note that this is a simplifying assumption, and
real-world decisions can be more complex due to factors like preferences, income constraints, and
market conditions.

Opportunity Cost
Opportunity cost refers to the value of the next best alternative that must be forgone in order to pursue
a different option. In other words, it's the cost of choosing one option over another.

Here's an example:

Let's say you have the option to either spend your evening studying for an exam or going to a movie
with friends. If you choose to go to the movie, the opportunity cost is the potential benefit you could
have gained from studying for the exam. This could include a better grade, improved understanding of
the material, or increased chances of academic success. In this scenario, the opportunity cost of going
to the movie is the educational benefit you gave up by not studying.

Incremental Cost
Incremental cost, also known as marginal cost, refers to the additional cost incurred by producing one
more unit of a good or service. It represents the change in total cost resulting from a specific change in
the level of activity. Incremental costs are essential for decision-making processes, especially when
considering whether to produce additional units or take on a new project.

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Here's an example:

Let's consider a manufacturing company that produces smartphones. The company is currently
producing 1,000 smartphones, and its total production cost is ₹100,000. If the company decides to
produce one more smartphone, and the total production cost increases to ₹100,500, then the
incremental cost of producing the additional smartphone is ₹500. This includes the additional cost of
materials, labor, and any other variable costs associated with producing that extra unit.
In this example, the incremental cost helps the company evaluate whether it's financially viable to
produce more smartphones. If the selling price per unit is greater than the incremental cost, it may be
profitable to produce additional units. If the selling price is less than the incremental cost, the company
would need to carefully consider whether it makes economic sense to increase production.

Time Perspective Principle

The time perspective principle, in the context of decision-making and economics, refers to the idea
that the value of money changes over time. It is based on the concept of the time value of money,
which suggests that a certain amount of money has different values at different points in time.
Generally, a sum of money today is considered more valuable than the same amount in the future.

Here's an example:

Let's say you have the option to receive ₹100 today or ₹100 a year from now. The time perspective
principle recognizes that the value of money is not constant, and factors such as inflation, opportunity
cost, and risk contribute to this dynamic.

If you choose to receive ₹100 today, you can immediately use or invest that money. However, if you
choose to receive ₹100 a year from now, you forgo the opportunity to use or invest that money during
the intervening period. Additionally, inflation may erode the purchasing power of the ₹100 over time.

This principle is crucial in various financial decisions, such as investment analysis, project evaluation,
and discounting future cash flows. It underscores the importance of considering the time value of
money when making choices that involve monetary outcomes at different points in time.

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Discounting Principle
The discounting principle, often used in finance and economics, involves adjusting the value of future
cash flows to reflect the time value of money. The idea is that a certain amount of money today is
worth more than the same amount in the future due to factors such as inflation, opportunity cost, and
risk.

The basic concept is that a future cash flow needs to be discounted back to its present value. The
discount rate used in this process represents the rate of return required by an investor to give up the
option of having the money today.

The discounting formula is:

{Present Value} = {Future Value}/ {(1 + {Discount Rate}) ^ {Number of Periods}}}

Here's an example:

Let's say you have the opportunity to receive ₹1000 one year from now, and the discount rate is 5%.
Using the discounting formula:

{Present Value} = {1000}/ {(1 + 0.05) ^1}

{Present Value} = {1000}/ {1.05}

{Present Value} = 952.38(approx.)

So, the present value of ₹1000 to be received one year from now, with a 5% discount rate, is
approximately ₹952.38. This reflects the idea that having ₹952.38 today is equivalent in value to
having ₹1000 a year from now, given the 5% discount rate.