mb0042,mb0042 – managerial economics, november 2012

Summer / May 2012

Master of Business Administration

Semester I

MB0042 – Managerial Economics - 4 Credits

(Book ID: B1131)

Assignment

Set- 1 (60 Marks)

Note: Each Question carries 10 marks. Answer all the questions.

Q1. Distinguish between a firm and an industry. Explain the equilibrium of a firm and

industry under perfect competition.

An : An industry is the name given to a certain type of manufacturing or retailing

environment. For example, the retail industry is the industry that involves everything from

clothes to computers, anything in the shops that get sold to the public. The retail industry is

very vast and has many sub divisions, such as electrical and cosmetics. More specialised

industries deal with a specific thing. The steel industry is a more specialised industry, dealing

with the making of steel and selling it on to buyers.

The difference between this and a firm is that a firm is the company that operates within the

industry to create the product. The firm might be a factory, or the chain of stores that sells the

clothes, within its industry. For example, one firm that makes steel might be Avida steel.

They create the steel in that firm for the steel industry.

A firm is usually a corporate company that controls a number of chains in the industry it is

operating within. For example in retail, the firm Arcadia stores owns the clothing chains Top

shop, Dorothy Perkins, Miss Selfridge, and Evans. These all operate for the firm Arcadia

within the industry of retail.

Several firms can operate in one industry to ensure that there is always competition to keep

prices reasonable and stop the market becoming a monopoly, which is where one firm is in

charge of the whole industry. Sometimes, a firm is not necessary within the industry and

independent chains and retailers can enter straight into the market without a firm behind

them, although this is risky. This is because one of the advantages of having a firm behind

you is that it is a safeguard against possible bankruptcy because the firm can support the

chain that it owns.

Profit maximization is one of the important assumptions of economics. It is assumed that the

entrepreneur always tries to maximize profit. Hence the firm or entrepreneur is said to be in

equilibrium if the profit is maximized. According to Tibor Sitovosky "A market or an

economy or any other group of persons and firms is in equilibrium when none of its

member's fells impelled to change his behaviour". Naturally, the firm will not try to change

its position when it is in equilibrium by maximizing profit.

There are two approaches to explain the equilibrium of the firm regards to profit

maximization. They are - total revenue-total cost approach and marginal revenue-marginal

cost approach. Here we concentrate only on MR - MC approach.

The equilibrium of firm on the basis of MR - MC approach has been presented in the table

below

According to MT -MC approach, when marginal revenue equals marginal cost the firm is in

equilibrium and gets maximum profit. Hence, a rational producer determines the quality of

output where marginal revenue equals marginal cost.

The difference between total revenue and total cost is highest 210, at four units of output. At

this output, both marginal revenue and marginal cost are equal, 80. Hence profit is

maximized. The firm is in equilibrium. It should be noted that the table relates to imperfect

competition, when price is reduced to sell more.

The following two conditions are necessary for a firm to be in equilibrium.

(a) The marginal revenue should be equal to marginal cost.

(b) The marginal cost curve should cut marginal revenue curve from below.

The equilibrium of a under to MR - MC approach has been presented in figure:-

The figure depicts the equilibrium of a firm under perfect competition. The same is

applicable to the firms under imperfect competition. The only difference is that the AR & MR

curves under imperfect competition are different and they are downward sloping.

In the figure 'OP' is the given price. Since, under perfect competition, average revenue equals

marginal revenue, the AR and MR curves are horizontal from P. The profit-maximizing

output is OM. Here, marginal revenue and marginal cost are equal. It is because MC and MR

curves intersect each other at point E. The firm earns profit equal to PEBC.

The first condition necessary for firm's equilibrium is that marginal cost should be equal to

marginal revenue. But this is not a sufficient condition. It is because the firm may not be in

equilibrium even if this condition is fulfilled. In the figure, this condition is fulfilled at point

F. but the firm is not in equilibrium. The profit is maximized only at output OM which is

higher than output ON.

The second condition necessary for equilibrium is that the marginal cost curve must cut

marginal revenue curve from below. This implies that marginal cost should be rising at the

point of intersection with MR curve. Hence, both the conditions have been fulfilled at point

E. In the figure, MC curve cuts MR curve from at point F from above. Hence, this point

cannot be the point of stable equilibrium. It is because before that point marginal cost exceeds

marginal revenue. It shows that it is not reasonable to increase output. After point F, the MR

curve lies above MC curve. This shows that it is reasonable to increase output.

Q2. Give a brief description of

a. Implicit and explicit cost

b. Actual and opportunity cost

a. Implicit and explicit cost

An : Explicit cost

An Explicit cost is a business expense accounted cost that can be easily identified such as

wage, rent and materials. Explicit costs gives clear and evident cash outflows from business

that decreases its end result profitability. This cost directly effect the revenue. Intangible

expenses such as goodwill and amortization are not explicit expense because these expenses

don't show clear effects on a business's revenue and expenses.

Implicit cost

An implicit cost results if the person who at first fo

Dear Students,

Get your assignments from Our ESTEEMED ORGANIZATION

smumbaassignment.com

Just email to [email protected] or S M S to +91 9995105420.

message Format - SMU MBA <Name> <E-MAIL ID> <SEM ? > To +91 9995105420 ,

we will reach back you with in 24H

Or Directly call our Middle East Office +974 55702886 .

More Info, Kindly visit smumbaassignment.com

Best Regards, Admin


Q3. A firm supplied 3000 pens at the rate of Rs 10. Next month, due to a rise of in the price

to 22 rs per pen the supply of the firm increases to 5000 pens. Find the elasticity of supply of

the pens.

Q4. What is monetary policy? Explain the general objectives and instruments of monetary

policy

Q5. Explain in brief the relationship between TR, AR, and MR under different market

condition.

Q6. What is a business cycle? Describe the different phases of a business cycle.

Dear Students,








Best Regards, Admin


Summer / May 2012

Master of Business Administration

Semester I

MB0042 – Managerial Economics - 4 Credits

(Book ID: B1131)

Assignment

Set- 2 (60 Marks)

Note: Each Question carries 10 marks. Answer all the questions.

Q1. Discuss the various measures that may be taken by a firm to counteract the evil effects of

a trade cycle.

An : FACTORS THAT SHAPE BUSINESS CYCLES

For centuries, economists in both the United States and Europe regarded economic downturns

as “diseases" that had to be treated; it followed, then, that economies characterized by growth

and affluence were regarded as "healthy" economies. By the end of the 19th century,

however, many economists had begun to recognize that economies were cyclical by their

very nature, and studies increasingly turned to determining which factors were primarily

responsible for shaping the direction and disposition of national, regional, and industry-

specific economies. Today, economists, corporate executives, and business owners cite

several factors as particularly important in shaping the complexion of business environments.

VOLATILITY OF INVESTMENT SPENDING

Variations in investment spending is one of the important factors in business cycles.

Investment spending is considered the most volatile component of the aggregate or total

demand (it varies much more from year to year than the largest component of the aggregate

demand, the consumption spending), and empirical studies by economists have revealed that

the volatility of the investment component is an important factor in explaining business

cycles in the United States. According to these studies, increases in investment spur a

subsequent increase in aggregate demand, leading to economic expansion. Decreases in

investment have the opposite effect. Indeed, economists can point to several points in

American history in which the importance of investment spending was made quite evident.

The Great Depression, for instance, was caused by a collapse in investment spending in the

aftermath of the stock market crash of 1929. Similarly, prosperity of the late 1950s was

attributed to a capital goods boom.

There are several reasons for the volatility that can often be seen in investment spending. One

generic reason is the pace at which investment accelerates in response to upward trends in

sales. This linkage, which is called the acceleration principle by economists, can be briefly

explained as follows. Suppose a firm is operating at full capacity. When sales of its goods

increase, output will have to be increased by increasing plant capacity through further

investment. As a result, changes in sales result in magnified percentage changes in

investment expenditures. This accelerates the pace of economic expansion, which generates

greater income in the economy, leading to further increases in sales. Thus, once the

expansion starts, the pace of investment spending accelerates. In more concrete terms, the

response of the investment spending is related to the rate at which sales are increasing. In

general, if an increase in sales is expanding, investment is spending rises, and if an increase

in sales has peaked and is beginning to slow, investment spending falls. Thus, the pace of

investment spending is influenced by changes in the rate of sales.

MOMENTUM

Many economists cite a certain "follow-the-leader" mentality in consumer spending. In

situations where consumer confidence is high and people adopt more free-spending habits,

other customers are deemed to be more likely to increase their spending as well. Conversely,

downturns in spending tend to be imitated as well.

TECHNOLOGICAL INNOVATIONS

Technological innovations can have an acute impact on business cycles. Indeed,

technological breakthroughs in communication, transportation, manufacturing, and other

operational areas can have a ripple effect throughout an industry or an economy.

Technological innovations may relate to production and use of a new product or production

of an existing product using a new process. The video imaging and personal computer

industries, for instance, have undergone immense technological innovations in recent years,

and the latter industry in particular has had a pronounced impact on the business operations

of countless organizations. However, technological innovations —and consequent increases

in investment—take place at irregular intervals. Fluctuating investments, due to variations in

the pace of technological innovations, lead to business fluctuations in the economy. There are

many reasons why the pace of technological innovations varies. Major innovations donor

occur every day. Nor do they take place at a constant rate. Chance factors greatly influence

the timing of major innovations, as well as the number of innovations in a particular year.

Economists consider the variations in technological innovations as random (with no

systematic pattern). Thus, irregularity in the pace of innovations in new products or processes

becomes a source of business fluctuations.

VARIATIONS IN INVENTORIES

Variations in inventories—expansion and contraction in the level of inventories of goods kept

by businesses—also contribute to business cycles. Inventories are the stocks of goods firms

keep unhand to meet demand for their products. How do variations in the level of inventories

trigger changes in a business cycle? Usually, during a business downturn, firms let their

inventories decline. As inventories dwindle, businesses ultimately find themselves short of

inventories. As result, they start increasing inventory levels by producing output greater than

sales, leading to an economic expansion. This expansion continues as long as the rate of

increase in sales holds up and producers continue to increase inventories at the preceding

rate. However, as the rate of increase insoles slows, firms begin to cut back on their inventory

accumulation. The subsequent reduction in inventory investment dampens the economic

expansion, and eventually causes an economic downturn. The process then repeats itself all

over again. It should be noted that while variations in inventory levels impact overall rates of

economic growth, the resulting business cycles are not really long. The business cycles

generated by fluctuations in inventories are called minor or short business cycles. These

periods, which usually last about two to four years, are sometimes also called inventory

cycles.

FLUCTUATIONS IN GOVERNMENT SPENDING

Variations in government spending are yet another source of business fluctuations. This may

appear to be an unlikely source, as the government is widely considered to be a stabilizing

force in the economy rather than a source of economic fluctuations or instability.

Nevertheless, government spending has been a major destabilizing force on several

occasions, especially during and after wars. Government spending increased by an enormous

amount during World War II, leading to an economic expansion that continued for several

years after the war. Government spending also increased, though to a smaller extent

compared to World War II, during the Korean and Vietnam wars. These also led to economic

expansions. However, government spending not only contributes to economic expansions,

but economic contractions as well. In fact, the recession of 1953-54 was caused by the

reduction in government spending after the Korean War ended. More recently, the end of the

Cold War resulted in a reduction in defence spending by the United States that had a

pronounced impact on certain defence-dependent industries and geographic regions.

POLITICALLY GENERATED BUSINESS CYCLES

Many economists have hypothesized that business cycles are the result of the politically

motivated use of macroeconomic policies (monetary and fiscal policies) that are designed to

serve the interest of politicians running for re-election. The theory of political business cycles

is predicated on the belief that elected officials (the president, members of congress,

governors, etc.) have a tendency to engineer expansionary macroeconomic policies in order

to aid their re-election efforts.

MONETARY POLICIES

Variations in the nation's monetary policies, independent of changes induced by political

pressures, are an important influence in business cycles as well. Use of fiscal policy—

increased government spending and/or tax cuts—is the most common way of boosting

aggregate demand, causing an economic expansion. Moreover, the decisions of the Federal

Reserve, which controls interest rates, can have a dramatic impact on consumer and investor

confidence as well.

FLUCTUATIONS IN EXPORTS AND IMPORTS

The difference between exports and imports is the net foreign demand for goods and services,

also called net exports. Because net exports are a component of the aggregate demand in the

economy, variations in exports and imports can lead to business fluctuations as well. There

are many reasons for variations in exports and imports over time. Growth in the gross

domestic product of an economy is the most important determinant of its demand for

imported goods—as people’s incomes grow, their appetite for additional goods and services,

including goods produced abroad, increases. The opposite holds when foreign economies are

growing—growth in incomes in foreign countries also leads to an increased demand for

imported goods by the residents of these countries. This, in turn, causes U.S. exports to grow.

Currency exchange rates can also have a dramatic impact on international trade—and hence,

domestic business cycles—as well.

KEYS TO SUCCESSFUL BUSINESS CYCLE MANAGEMENT

Small business owners can take several steps to help ensure that their establishments weather

business cycles with a minimum of uncertainty and damage. "The concept of cycle

management may be relatively new," wrote Matthew Gallagher in

Chemical Marketing Reporter,

"but it already has many adherents who agree that strategies that work at the bottom of a

cycle need to be adopted as much as ones that work at the top of a cycle. While there will be

no definitive formula for every company, the approaches generally stress a long-term view

which focuses on a firm's key strengths and encourages it to plan with greater discretion at all

times. Essentially, businesses are operating toward operating on a more even keel."Specific

tips for managing business cycle downturns include the following: Flexibility — According

to Gallagher, "part of growth management is a flexible business plan that allows for

development times that span the entire cycle and includes alternative recession-resistant

funding structures."Long-Term Planning—Consultants encourage small businesses to adopt a

moderate stance in their long-range forecasting. Attention to Customers—this can be an

especially important factor for businesses seeking to emerge from an economic downturn.

"Staying close to the customers is a tough discipline to maintain in good times, but it is

especially crucial coming out of bad times," stated Arthur Dalasi Industry Week.

"Your customer is the best test of when your own upturn will arrive. Customers, especially

industrial and commercial ones, can give you early indications of their interest in placing

large orders in coming months."Objectivity—Small business owners need to maintain a high

level of objectivity when riding business cycles. Operational decisions based on hopes and

desires rather than a sober examination of the facts can devastate a business, especially in

economic down periods. Study—"Timing any action for an upturn is tricky, and the

consequences of being early or late are serious," said Deltas. "For example, expanding a sales

force when the markets don't materialize not only places big demands on working capital, but

also makes it hard to sustain the motivation of the sales-people. If the force is improved too

late, the cost is decreased market share or decreased quality of the customer base. How does

the company strike the right balance between being early or late? Listening to economists,

politicians, and media to get a sense of what is happening is useful, but it is unwise to rely

solely on their sources. The best route is to avoid trying to predict the upturn. Instead, listen

to your customers and know your own response-time requirements."

Dear Students,








Best Regards, Admin


Q2. Define the term equilibrium. Explain the changes in market equilibrium and effects to

shifts in supply and demand.

Q3. What do you mean by pricing policy? Explain the various objective of pricing policy of a

firm.

Q4. Critically examine the Marris growth maximising model

Q5. Explain how a product would reach equilibrium position with the help of ISO - Quants

and ISO-Cost curve

Q6. Suppose your manufacturing company planning to release a new product into market,

Explain the various methods forecasting for a new product.

Dear Students,








Best Regards, Admin


mb0042,mb0042 – managerial economics, november 2012

Documents