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 :

Permanent Enrollment Number (PEN) :

Roll Number :

Student Name :

INSTRUCTIONS

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

ASSIGNMENT DETAILS MARKS

Assignment A Five Subjective Questions 10

Assignment B Three Subjective Questions + Case Study 10

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 : _________________

( ) Tick mark in front of the assignments submitted

Assignment A Assignment B Assignment 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.

MRS x ,y MU xMU y

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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.

C f X,T,P f ,Kb c

Where C totals cost

X Output

T Technology

P f Prices of factors

K Fixed factors

TC TFC TVC

Total Cost Curves

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

AC TC

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Average cost further can be categorized as average fixed cost (AFC) and average

variable cost (AVC). AFC TFC

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AVC TVC

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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 whats 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: A Perfectly Competitive Market is one in which the number of sellers is large and all of them are producing homogeneous goods, and there is no price competition.

A price is set by the industry and each firm acts as a price taker, this happens because all firms

are producing homogeneous goods due to which they cannot set different prices, because if a

firm sets different prices the consumer will shift towards another firm.

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 Baumols

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 Baumols Sales Revenue Maximisation

Theory states that:

Managers 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.

Q = Profit Maximizing Output

QS = Sales Maximizing Output

QRS = Constrained Sales Maximizing Output

= Profit Curve

3) 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 competitors 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