Master of Business Administration- MBA Semester 1 MB 0042/ MBF 105 Managerial Economics

Question 1- Discuss the profit maximising model in detail Answers1: Profit maximization is the short run or long run process by which a firm determines the price and output level that returns the greatest profit. There are several approaches to this problem. The total revenuetotal cost perspective relies on the fact that profit equals revenue minus cost and focuses on maximizing this difference, and the marginal revenuemarginal cost perspective is based on the fact that total profit reaches its maximum point where marginal revenue equals marginal cost.

An alternative perspective relies on the relationship that, for each unit sold, marginal profit equals marginal revenue (MR) minus marginal cost (MC). Then, if marginal revenue is greater than marginal cost at some level of output, marginal profit is positive and thus a greater quantity should be produced, and if marginal revenue is less than marginal cost, marginal profit is negative and a lesser quantity should be produced. At the output level at which marginal revenue equals marginal cost, marginal profit is zero and this quantity is the one that maximizes profit. Since total profit increases when marginal profit is positive and total profit decreases when marginal profit is negative, it must reach a maximum where marginal profit is zero - or where marginal cost equals marginal revenue - and where lower or higher output levels give lower profit levels. If the firm is operating in a non-competitive market, changes would have to be made to the diagrams.

Question 2: Discuss the various survey methods to forecast demand. Answers 2: Survey Methods of Forecasting Demand: Survey Methods: Survey methods help us in obtaining information about the future purchase plans of potential buyers through collecting the opinions of experts or by interviewing the consumers. These methods are extensively used in short run and estimating the demand for new products. There are different approaches under survey methods. Consumers interview method: Under this method, efforts are made to collect the relevant information directly from the consumers with regard to their future purchase plans. In order to gather information from consumers, a number of alternative techniques are developed from time to time. Among them, the following are some of the important ones. A) Survey of buyers intentions or preferences: Under this method, consumerbuyers are requested to indicate their preferences and willingness about particular products. They are asked to reveal their future purchase plans with respect to specific items. B) Direct Interview Method: Under this method, customers are directly contacted and interviewed. Direct and simple questions are asked to them. i) Complete enumeration method: Under this method, all potential customers are interviewed in a particular city or a region. ii) Sample survey method: Under this method, different cross sections of customers that make up the bulk of the market are carefully chosen. Only such consumers selected from the relevant market through some sampling method are interviewed or surveyed. Collective opinion method or opinion survey method: Under this method, sales representatives, professional experts and the market consultants and others are asked to express their considered opinions about the volume of sales expected in the future. Experts Opinion Method: Under this method, outside experts are appointed. They are supplied with all kinds of information and statistical data. The management requests the experts to express their considered opinions and views about the expected future sales of the company. End Use Method: Under this method, the sale of the product under consideration is projected on the basis of demand surveys of the industries using the given product as an intermediate product.

Question 3: Describe the Characteristics of Monopolistic Competition Answers 3: Characteristics of Monopolistic Competition: 1. Existence of a large Number of firms: Under Monopolistic competition, the number of firms producing a product will be large. The size of each firm is small. No individual firm can influence the market price. Hence, each firm will act independently without worrying about the policies followed by other firms. 2. Market is characterized by imperfections: Imperfections may arise due to advertisements, differences in transport cost, irrational preferences of consumers, ignorance about the availability of different brands of products and prices of products etc. 3. Free entry and exit of firms: Each firm produces a very close substitute for the existing brands of a product. Thus, differentiation provides ample opportunity for a firm to enter with the group or industry. 4. Element of monopoly and competition: Every firm enjoys some sort of monopoly power over the product it produces. But it is neither absolute nor complete because each product faces competition from rival sellers selling different brands of the product. 5. Similar products but not identical: Under monopolistic competition, the firm produces commodities which are similar to one another but not identical or homogenous. For E.g. toothpastes, blades, cigarettes, shoes etc, 6. Non-price competition: In this market, there will be competition among Minimonopolists for their products and not for the price of the product. Thus, there is product competition rather than price competition. 7. Definite preference of the consumers: Consumers will have definite preference for particular variety or brands loyalty owing to the special features of a product produced by a particular firm. 8. Product differentiation: The most outstanding feature of monopolistic competition is product differentiation. Firms adopt different techniques to differentiate their products from one another. 9. Selling Costs: All those expenses which are incurred on sales promotion of a product are called as selling costs. In short, selling costs represents all those selling activities which are directed to persuade buyers to change their preferences so as to maximize the demand for a given commodity 10. The concept of Industry & Product Groups: Prof. Chamberlin has made an attempt to redefine the industry. According to him, the monopolistically competitive industry is a group of firms producing a closely related commodity referred to as product group thus group refers to a collection of firms that produce closely related but not identical products.
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Question 4: Explain the price elasticity of demand & also its applications.
Answers 4: A measure of the relationship between a change in the quantity demanded of a particular good and a change in its price. Price elasticity of demand is a term in economics often used when discussing price sensitivity. The formula for calculating price elasticity of demand is as follows:

Price Elasticity of Demand = % Change in Quantity Demanded / % Change in Price The application of Price elasticity is as follows: Helps in fixing pricing: Elasticity measures help the sales manager in fixing the price of his product. Helps in Production Planning: The concept is also important to the economic planners of the country. In trying to fix the production target for various goods in a plan, a planner must estimate the likely demand for goods at the end of the plan. The price elasticity of demand as well as cross elasticity would determine the substitution between goods and hence useful in fixing the output mix in a production period. Helps in fixing tax rates: The concept is also useful to the policy makers of the government, in particular in determining taxation policy, minimum wages policy, stabilization programme for agriculture, and price policies for various other goods. Sales forecasting: The firm can forecast the impact of a change in price on its sales volume, and sales revenue (total revenue, TR). Pricing policy: Knowing Price Elasticity of Demand helps the firm decide whether to raise or lower price, or whether to price discriminate. Price discrimination is a policy of charging consumers different prices for the same product. If demand is elastic, revenue is gained by reducing price, but if demand is inelastic, revenue is gained by raising price. Non-pricing policy: When Price Elasticity of Demand is highly elastic, the firm can use advertising and other promotional techniques to reduce elasticity.

Question 5: Explain the factors determining the elasticity of supply Answers 5: Factors determining the elasticity of supply are as follows:

Time period: Time has a greater influence on elasticity of supply than on demand. Generally supply tends to be inelastic in the short run because time available to organize and adjust supply to demand is insufficient. Supply would be more elastic in the long run. Availability and mobility of factors of production: When factors of production are available in plenty and freely mobile from one occupation to another, supply tends to be elastic and vice versa. Technological improvements: Modern methods of production expand output and hence supply tends to be elastic. Old methods reduce output and supply tends to be inelastic. Cost of production: If cost of production rise rapidly as output expands, then there will not be much incentive to increase output as the extra benefit will be choked off by increase in cost. Hence supply tends to be inelastic and vice versa. Kinds and nature of markets: If the seller is selling his product in different markets, supply tends to be elastic in any one of the market because, a fall in the price in one market will induce him to sell in another market. Again, if he is producing several types of goods and can switch over easily from one to another, then each of his products will be elastic in supply. Political conditions: Political conditions may disrupt production of a product. In that case, supply tends to become inelastic. Number of sellers: Supply tends to become more elastic if there are more sellers freely selling their products and vice versa. Prices of related goods: A firm can charge a higher price for its products, if prices of other products are higher and vice versa

Question 6: Discuss the law of returns to scale with example. Answers 6: These three laws of returns to scale are now explained, in brief, under separate heads. Increasing Returns to Scale: If the output of a firm increases more than in proportion to an equal percentage increase in all inputs, the production is said to exhibit increasing returns to scale. For example, if the amount of inputs are doubled and the output increases by more than double, it is said to be an increasing returns to scale. When there is an increase in the scale of production, it leads to lower average cost per unit produced as the firm enjoys economies of scale. Constant Returns to Scale: When all inputs are increased by a certain percentage, the output increases by the same percentage, the production function is said to exhibit constant returns to scale. For example, if a firm doubles inputs, it doubles output. In case, it triples output. The constant scale of production has no effect on average cost per unit produced. Diminishing Returns to Scale: The term 'diminishing' returns to scale refers to scale where output increases in a smaller proportion than the increase in all inputs. For example, if a firm increases inputs by 100% but the output decreases by less than 100%, the firm is said to exhibit decreasing returns to scale. In case of decreasing returns to scale, the firm faces diseconomies of scale. The firm's scale of production leads to higher average cost per unit produced