F-2,Block, Amity Campus

Sec-125, Nodia (UP)

India 201303

ASSIGNMENTS
PROGRAM: Masters in Finance and Control

SEMESTER-I
Subject Name : Managerial
Economics
Study COUNTRY : Botswana
Permanent Enrollment Number (PEN) :
Roll Number :
Student Name : Boyce Mangole

INSTRUCTIONS

a) Students are required to submit all three assignment sets.

ASSIGNMENT DETAILS MARK

S
Assignment A Five Subjective Questions 10
Assignment B Three Subjective Questions + 10
 Case Study
Assignment C 45 Objective Questions 10

b) Total weightage given to these assignments is 30%. OR 30

Marks
c) All assignments are to be completed as typed in word/pdf.
d) All questions are required to be attempted.
e) All the three assignments are to be completed by due
dates (specified from time to time) and need to be
submitted for evaluation by Amity University.
f) The evaluated assignment marks will be made available
within six weeks. Thereafter, these will be destroyed at
the end of each semester.
g) The students have to attached a scan signature in the
form.

Signature : _____ ____________________

Date : ______17 December2009___________

( √ ) Tick mark in front of the assignments submitted

Assignment Assignment Assignment

‘A’ ‘B’ ‘C’

MANAGERIAL ECONOMICS

Assignment ‘A’

Q.1. what are indifference curves?

Answer: an indifference curve shows the ordering of preferences by a consumer i.e. it
indicates the combination of two products between which the consumer is indifferent, or
combination which will yield the same level of satisfaction.

Explain the consumers’ equilibrium under the assumptions of ordinal approach.

Answer: The consumer is in equilibrium when he maximizes his utility, given his
income and the market prices. Two conditions must be fulfilled for the consumer to
be in equilibrium.

The first condition is that the marginal rate of substitution be equal to the ratio of
commodity prices. This is necessary but not sufficient condition.

MU
ffffffffffffxffff Pffffxffff
MRS x ,y = =
MU y P y

The second condition is that the indifference curve be convex to the origin. This
condition is fulfilled by the axiom of diminishing marginal rate of substitution of x for
y and vice versa.

Q.2. Examine the concept and relationship of Total, Average and marginal costs with
the help of suitable diagram.

Answer: Total cost is the total expenditure incurred on the production. It connotes
both explicit and implicit money expenditure and includes fixed and variable costs.

b c
C = f X,T,P f ,K

Where totals cost

C=
 Output
X=

Technology
T=

Prices of factors
Pf =

Fixed factors
K=

TC = TFC + TVC

Total Cost Curves

Average cost is obtained by dividing the total cost by the total output.

TC
AC = ffffffffff
Q
Average cost further can be categorized as average fixed cost (AFC) and average

variable cost (AVC).

TFC
AFC = fffffffffffffff
Q

TVC
AVC = fffffffffffffff
Q

Average cost curves

Marginal Cost

Marginal cost is the change in the total cost for producing an extra unit of output.

MC = ∂TC/∂Q

Marginal Cost
Curve
Q.3. Differentiate and elaborate the concepts of returns to scale and law of variable
proportions.

Answer: Laws of Returns to Scale

In the long run expansion of output may be achieved by varying all factors by the
same proportion or by different proportions. The laws of returns to scale refer to the
effects of scale relationship. Three types of returns to scale are observed.

• Constant returns to scale

• Increasing returns to scale

• Decreasing returns to scale

Constant returns to scale

If the quantity of all inputs used in the production is increased by a given proportion
and we have output increased in the same proportion; it is termed as constant
returns to scale.
Increasing returns to scale

If output increases by a greater proportion in comparison to a change in the scale of

inputs it is termed as increasing Returns to Scale. The causes of increasing returns
to scale are:

• Specialization of labor

• Inventory Economies

• Managerial indivisibilities

• Technical indivisibilities

Diminishing Returns to Scale

If output increases by a smaller proportion in comparison to the change in the scale

of inputs, it is described as diminishing returns to scale. The reasons of diminishing
returns to scale are:

• Managerial inefficiency

• Exhaustible natural resources

• Increased bureaucratic

• Labor inefficiency
 • Pressure on inputs market due to increasing demand

• Pressure on inputs prices due to bulk purchase

However this differs from the law of variable propotions in that in this one if one of
the factors of production are (usually capital K) is fixed after a certain range of
production additional output (i.e. marginal product ) starts to diminish. It is also
known as the law of diminishing returns. The range of output over which the
marginal products of the factors are positive but diminishing is considered as
equilibrium range of output. The range of increasing returns to a factor and the
range of negative productivity are not suitable for equilibrium.

Three stages of production

Stage 1 Capital is underutilized and Successive units of L add greater Amounts to TP

Stage 2 Addition to TP due to increase in L continues to be positive but is falling with

each unit

Stage 3 Fixed Input capacity is reached and additional

Q.4. Why is demand forecasting essential? What are the possible consequences if a
large scale firm places its product in the market without having estimated the demand
for its product?

Answer: demand forecasting is essential due to the following:

• Better planning and allocation of resources

• Appropriate production scheduling
• Inventory control
• Determining appropriate pricing policies
• Setting s les targets and establishing controls and incentives.
• Planning a new unit or expanding existing one
• Planning long term financial requirements
• Planning Human Resource Development strategies

There are two possible consequences when a firm places its products on the market
without having estimated the demand for its product
 1) The buyers may ignore the product as a result of the fact that it is abundant in the
market therefore its demand is relatively lower and hence reduces or make no
profit for the firm
2) It may be a new product which every one in the market what’s to use it and in
that sense there would be more demand for that product which would boost the
returns of the firm.

5) Discuss the various steps involved in a managerial decision making process. Explain,
in detail, any two group decision making techniques.

The first step in the decision-making process is identifying the problem. Problem
identification is probably the most critical art of the decision making process, for it is
what determines the direction that the decision making process takes, and, ultimately,
the decision that is made.

The second step in decision-making process is generating alternative

solutions to the problem. This step involves identifying items or activities that
could reduce or eliminate the difference between the actual situation and the
desired situation. For this step to be effective, the decision makers must allot
enough time to generate creative alternatives as well as ensure that all
individuals involved in the process exercise patience and tolerance of others
and their ideas.

In the Pursuit of “quick fix” managers too often shortchange this step by
failing to consider more than one or two alternatives, which reduces the
opportunity to identify effective solutions. After generating a list of
alternatives, the arduous task of evaluating each of them begins. Numerous
methods exist for evaluating the alternatives, including determining the pros
and cons of each; performing a cost-benefit analysis for each alternative; and
weighting factors important in the decision, ranking each alternative relative
to its ability to meet each factor, and then multiplying cumulatively to provide
a final value for each alternative.

Selecting the Best AlternativeAfter the decision-makers have evaluated all

the alternatives, it is time for the fourth step in the decision-making process;
choosing the best alternative. Depending on the evaluation method used, the
selection process can be fairly straightforward. The best alternative could be
the one with the most "pros" and the fewest "cons"; the one with the greatest
benefits and the lowest costs; or the one with the highest cumulative value, if
using weighting.

Implementing the Decision This is the step in the decision making process
that transforms the selected alternative from an abstract situation into reality.
Implementing the decision involves planning and executing the actions that
must take place so that the selected alternative can actually solve the
problem.

Evaluating the Decision In evaluating the decision, the sixth and final step in
the decision-making process, managers gather information to determine the
effectiveness of their decision. Has original problem identified in the first step
been resolved? If not, is the company closer to the situation it desired than it
was at the beginning of the decision-making process?

Group Decision Techniques

Brainstorming is a technique in which group members spontaneously

suggest keys to solve a problem. Its primary purpose is to generate a
multitude of creative alternatives, regardless of the likelihood of their being
implemented.

Nominal Group Technique The Nominal Group Technique involves, the use
of highly structured meeting agenda and restricts discussion or interpersonal
communication during the decision making process. While the group
members are all physically present, they are required to operate
independently.
 Assignment ‘B’

Q.1. Why a firm is price taker and not a price maker under perfect market conditions?

Answer:

Q.2. Profit maximization is theoretically the most sound but practically unattainable
objective of business firms. In the light of this statement critically appraise the Baumol’s
sales revenue maximization theory as an alternative objective of the firm.

Answer: Profit maximization is theoretically the most sound but practically

unattainable objective of business firms Baumol’s Sales Revenue Maximisation
Theory states that:

• Manager’s rewards are more closely linked to Sales rather than Profits.

• Firms aim to maximize Sales Revenue, but subject to a Profit Constraint.

• Profit constraint is exogenously determined by the demand and expectations

of the shareholders, banks and other financial institutions.

• A Sales Revenue Maximizing firm, in general, produces a greater output than

a Profit Maximizing Firm and sells at a price lower than the profit maximizer.

• The maximum sales revenue will be where e = 1 (and hence MR = 0) and will
be earned only if the profit constraint is not operative.

• If the profit constraint is operative the sales revenue maximize will operate in
the area where price elasticity is greater than unity.

QΠ = Profit Maximizing Output

QS = Sales Maximizing Output

QRS = Constrained Sales Maximizing Output

Π = Profit Curve

1) Distinguish between skimming price and penetration price policy. Which of these
policies is relevant in pricing a new product under different competitive conditions
in the market?
Answer: Skimming pricing is the strategy of establishing a high initial price for a
product with a view to “skimming the cream off the market” at the upper end of
the demand curve. It is accompanied by heavy expenditure on promotion. A
skimming strategy may be recommended when the nature of demand is
uncertain, when a company has expended large sums of money on research and
development for a new product, when the competition is expected to develop and
market a similar product in the near future, or when the product is so innovative
that the market is expected to mature very slowly. Under these circumstances, a
skimming strategy has several advantages. At the top of the demand curve, price
elasticity is low. Besides, in the absence of any close substitute, cross-elasticity
is also low. These factors, along with heavy emphasis on promotion, tend to help
the product make significant inroads into the market. The high price also helps
segment the market. Only non price-conscious customers will buy a new product
during its initial stage. Later on, the mass market can be tapped by lowering the
price. If there are doubts about the shape of the demand curve for a given
product and the initial price is found to be too high, price may be slashed.
However, it is very difficult to start low and then raise the price. Raising a low
price may annoy potential customers, and anticipated drops in price may retard
demand at a particular price. For a financially weak company, a skimming
strategy may provide immediate relief. This model depends on selling enough
units at the higher price to cover promotion and development costs.
Where as Penetration pricing is the strategy of entering the market with a low
initial price so that a greater share of the market can be captured. The
penetration strategy is used when an elite market does not exist and demand
seems to be elastic over the entire demand curve, even during early stages of
product introduction. High price elasticity of demand is probably the most
important reason for adopting a penetration strategy. The penetration strategy is
also used to discourage competitors from entering the market. When competitors
seem to be encroaching on a market, an attempt is made to lure them away by
means of penetration pricing, which yields lower margins. A competitor’s costs
play a decisive role in this pricing strategy because a cost advantage over the
existing manufacturer might persuade another firm to enter the market,
regardless of how low the margin of the former may be. One may also turn to a
penetration strategy with a view to achieving economies of scale. Savings in
production costs alone may not be an important factor in setting low prices
because, in the absence of price elasticity, it is difficult to generate sufficient
sales. Finally, before adopting penetration pricing, one must make sure that the
product fits the lifestyles of the mass market. For example, although it might not
be difficult for people to accept imitation milk, cereals made from petroleum
products would probably have difficulty in becoming popular. How low the
penetration price should be differs from case to case.
ASSIGNMENT C

1 A 21 C
2 B 22 D
3 B 23 B
4 A 24 D
5 C 25 B
6 A 26 D
7 C 27 D
8 D 28 C
9 D 29 D
10 B 30 D
11 B 31 B
12 D 32 B
13 B 33 A
14 A 34 B
15 B 35 D
16 C 36 A
17 A 37 A
18 B 38 A
19 C 39 A
20 B 40 A