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IGNOU MBA MS-09 Solved Assignments July 2010

Course Code Course Title Assignment Code Coverage Attempt All the uestions!

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MS- 09 Managerial Economics 9/TMA/SEM-II/2010 All Bloc s

1! "A #lose $el%tionship &et'een m%n%gement %nd e#onomi#s h%s led to the development o( m%n%ge$i%l e#onomi#s!) *+pl%in this st%tement Solution, Managerial economics is the use of economic mo es of thought to anal!"e #usiness situations.$%ouglas& 'Managerial economics( is concerne )ith the a**lication of economic *rinci*les an ecision ma+ing *rocess )ithin the firm or metho ologies to the

organi"ation un er the con itions of uncertaint!$. S*encer an Siegelman efine it as The integration of economic theor! )ith #usiness *ractices for the *ur*ose of facilitating ecision ma+ing an for)ar *lanning #! management.$ Managerial economics is the a**lication of economic theor! an anal!sis to *ractice of #usiness firms an other institutions.$ , common threa runs through all these escri*tions of managerial economics )hich is using a frame)or+ of anal!sis to arri-e at informe ecisions to ma.imi"e the firm(s o#/ecti-es& often in an en-ironment of uncertaint!. It is im*ortant to recogni"e that ecisions that are +nee /er+ or gut feel ecisions. ecisions ta+en )hile em*lo!ing a frame)or+ of anal!sis are li+el! to #e more successful than

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0conomic acti-it! is the constant effort to match en s to means #ecause of scarcit! of resources. The o*timal economic acti-it! is to ma.imise the attainment of en s& the means an their scarcities or to minimise the use of resources& gi-en the en s an their *riorities. %ecision ma+ing #! management is trul! economic in nature #ecause it in-ol-es choices among a set of alternati-es 1 alternati-e courses of action. The o*timal ecision ma+ing is an act of o*timal economic constraints. This /ustifies an choice& consi ering o#/ecti-es an

e-aluation of managerial ecisions through conce*ts& *rece*ts& tools an techni2ues of economic anal!sis of the follo)ing t!*es. 0conomics has e-elo*e se-eral conce*ts an anal!tical tools to eal )ith the 2uestion of allocation of scarce resources among com*eting en s. The non1tri-ial *ro#lem that nee s to #e a resse is ho) an econom! through its -arious institutions sol-es or ans)ers the three crucial 2uestions *ose a#o-e. There are three )a!s #! )hich this can #e achie-e . One& entirel! #! the mar+et mechanism& t)o& entirel! #! the go-ernment or finall!& an more reasona#l!& #! a com#ination of the first t)o a**roaches. 3ealisticall! all economies em*lo! the last o*tion& #ut the relati-e roles of the mar+et an go-ernment -ar! across countries. 4or*le& in In ia the mar+et has starte *la!ing a more im*ortant role in the econom! )hile the go-ernment has #egun to )ith ra) form certain acti-ities. Thus& the mar+et mechanism is gaining im*ortance. , similar change is ha**ening all o-er the )orl & inclu ing in China. But there are economies such as M!anmar an Cu#a )here the go-ernment still *la!s an o-er)helming *art in sol-ing the resource allocation *ro#lem. 0ssentiall!& the mar+et is su**ose to gui e resources to their most efficient use. 4or*le if the salaries earne #! MB, egree hol ers continue to rise& there )ill #e more an more stu ents )anting to

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earn the egree an more an more institutes )anting to *ro-i e such egrees to ta+e a -antage of this o**ortunit!. The go-ernment ma! not force this to ha**en& it )ill ha**en on its o)n through the mar+et mechanism. The go-ernment& if an!thing& coul function to ensure 2ualit! an consumer *rotection. 5555555555555555555555555555555555555555555555555555 2! Given % (i$m-s dem%nd (un#tion. / 0 21 - 0!2 %nd the %ve$%ge #ost (un#tion. A3 0 2 4 5 6 78 6 79 . #%l#ul%te the level o( output 'hi#h %: m%+imi;es tot%l $evenue &: m%+imi;es p$o(its Solution, 'ill uplo%d soon<<<<<<! 555555555555555555555555555555555555555555555555555 7! B$ie(ly des#$i&e the Optim%l 3om&in%tion o( inputs 'ith the help o( %n e+%mple! Solution, Let6s assume )hat the! *ro uce the same *ro uct so re-enue from each out*ut is e2ual #et)een *rofessions. ,nother assum*tion 1 there is falling 7 ecreasing8 marginal *ro ucti-it! in each *rofession& etc. Basic e2uili#rium is escri#e #! sim*le con ition9 MP7:8 ; <7:8 5 MP7=8 ; <7=8 5 ... 5 MP7n8 ; <7n8 )here9 MP 1 marginal *ro uct < 1 )age thus9 =>>;?@>> 5 =;@ 5 :A>;=4> *ro-i e a regulator!

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=BC;?4>> 5 ::;:A 5 :AC;=4> @>>;?C>> 5 @;C 5 :44;=4> But =;@ D ::;:A D @;C & or9 :A>;=4> D :AC;=4> D :44;=4> ,8 4irm is not using o*timal com#ination of in*uts. B8 To mo-e com#ination to)ar e2uili#rium an assuming )hat )ages are fi.e #! mar+et )e nee to #alance marginal *ro ucts of )or+ers. MP of manual )or+ers might sta! the same 7no changes in )or+ers re2uire 8 MP of technicians shoul #e ecrease 7more )or+ers re2uire 8 MP of su*er-isors shoul #e increase 7less )or+ers re2uire 8 Though changes actuall! e*en s on a-aila#le #u get& mar+et eman & *lanne ;e.*ecte out*ut re-enues& etc. 7man! ifferent assum*tions8. 5555555555555555555555555555555555555555555555555555

1! =oes /$i#e =is#$imin%tion e+ist in the $e%l 'o$ld> =is#uss 'ith $e(e$en#e to %ny p%$ti#ul%$ p$odu#t o$ se$vi#e! Solution , Price iscrimination or !iel management occurs )hen a firm charges a ifferent *rice to ifferent grou*s of consumers for an i entical goo or ser-ice& for reasons not associate )ith costs. It is im*ortant to stress that charging ifferent *rices for similar goo s is not *ure *rice iscrimination. <e must #e careful to istinguish #et)een *rice iscrimination an *ro uct ifferentiation E ifferentiation of the *ro uct gi-es the su**lier greater control o-er *rice an the *otential to charge consumers a

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*remium *rice #ecause of actual or *ercei-e *erformance of a goo or ser-ice.

ifferences in the 2ualit! ;

Con itions necessar! for *rice iscrimination to )or+. 0ssentiall! there are t)o main con itions re2uire for iscriminator! *ricing : %ifferences in *rice elasticit! of eman #et)een mar+ets9 There must #e a ifferent *rice elasticit! of eman from each grou* of consumers. The firm is then a#le to charge a higher *rice to the grou* )ith a more *rice inelastic eman an a relati-el! lo)er *rice to the grou* )ith a more elastic eman . B! a o*ting such a strateg!& the firm can increase its total re-enue an *rofits 7i.e. achie-e a higher le-el of *ro ucer sur*lus8. To *rofit ma.imise& the firm )ill see+ to set marginal re-enue 5 to marginal cost in each se*arate 7segmente 8 mar+et. = Barriers to *re-ent consumers s)itching from one su**lier to another9 The firm must #e a#le to *re-ent mar+et see*age$ or consumer s)itching$ E efine as a *rocess )here#! consumers )ho ha-e *urchase a goo or ser-ice at a lo)er *rice are a#le to re1sell it to those consumers )ho )oul ha-e normall! *ai the e.*ensi-e *rice. This can #e one in a num#er of )a!s& E an is *ro#a#l! easier to achie-e )ith the *ro-ision of a uni2ue ser-ice such as a haircut rather than )ith the e.change of tangi#le goo s. See*age might #e *re-ente #! selling a *ro uct to consumers at uni2ue an an! circumstances. *+%mples o( p$i#e dis#$imin%tion Price iscrimination is an e.tremel! common t!*e of *ricing strateg! o*erate #! -irtuall! e-er! #usiness )ith some iscretionar! *ricing *o)er. It is a classic *art of *rice com*etition #et)een firms see+ing a mar+et a -antage or to *rotect an esta#lishe mar+et *osition. 7a8 Perfect Price %iscrimination E charging )hate-er the mar+et )ill #ear ifferent *oints in time E for*le )ith the use of time s*ecific airline tic+ets that cannot #e resol un er

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Sometimes +no)n as o*timal *ricing& )ith *erfect *rice iscrimination& the firm se*arates the )hole mar+et into each in i-i ual consumer an charges them the *rice the! are )illing an a#le to *a!. If successful& the firm can e.tract all consumer sur*lus that lies #eneath the eman cur-e an turn it into e.tra *ro ucer re-enue 7or *ro ucer sur*lus8. This is im*ossi#le to achie-e unless the firm +no)s e-er! consumer(s *references an & as a result& is unli+el! to occur in the real )orl . The transactions costs in-ol-e in fin ing out through mar+et research )hat each #u!er is *re*are to *a! is the main #loc+ or #arrier to a #usinesses engaging in this form of *rice iscrimination. If the mono*olist is a#le to *erfectl! segment the mar+et& then the a-erage re-enue cur-e effecti-el! #ecomes the marginal re-enue cur-e for the firm. The mono*olist )ill continue to see e.tra units as long as the e.tra re-enue e.cee s the marginal cost of *ro uction. The realit! is that& although o*timal *ricing can an oes ta+e *lace in the real )orl & most su**liers an consumers *refer to )or+ )ith *rice lists an *rice menus from )hich tra e can ta+e *lace rather than ha-ing to negotiate a *rice for each unit of a *ro uct #ought an sol . Secon %egree Price %iscrimination This t!*e of *rice iscrimination in-ol-es #usinesses selling off *ac+ages of a *ro uct eeme to #e sur*lus ca*acit! at lo)er *rices than the *re-iousl! *u#lishe ;a -ertise *rice.*les of this can often #e foun in the hotel an airline in ustries )here s*are rooms an seats are sol on a last minute stan #! #asis. In these t!*es of in ustr!& the fi.e costs of *ro uction are high. ,t the same time the marginal or -aria#le costs are small an *re icta#le. If there are unsol airline tic+ets or hotel rooms& it is often in the #usinesses #est interest to offloa an! s*are ca*acit! at a iscount *rices& al)a!s

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*ro-i ing that the chea*er *rice that a marginal cost of each unit.

s to re-enue at least co-ers the

There is nearl! al)a!s some su**lementar! *rofit to #e ma e from this strateg!. ,n & it can also #e an effecti-e )a! of securing a itional mar+et share )ithin an oligo*ol! as the main su**liers( #attle for mar+et ominance. 4irms ma! #e 2uite ha**! to acce*t a smaller *rofit margin if it means that the! manage to steal an a -antage on their ri-al firms. The e.*ansion of e1commerce #! #oth )ell esta#lishe #usinesses an ne) entrants to online retailing has seen a further gro)th in secon egree *rice iscrimination. 0arl!1#ir iscounts E e.tra cash1flo) ifferent *ricing strateg! to the one The lo) cost airlines follo) a

outline a#o-e. Customers #oo+ing earl! )ith carriers such as 0as!Fet )ill normall! fin lo)er *rices if the! are *re*are to commit themsel-es to a flight #! #oo+ing earl!. This gi-es the airline the a -antage of +no)ing ho) full their flights are li+el! to #e an a source of cash1flo) in the )ee+s an months *rior to the ser-ice #eing *ro-i e . Closer to the ate an time of the sche ule ser-ice& the *rice rises& on the sim*le /ustification that consumer(s eman for a flight #ecomes more inelastic the nearer to the time of the ser-ice. Peo*le )ho #oo+ late often regar tra-el to their inten e e*arture. ,irlines call this *rice iscrimination !iel management E #ut es*ite the fanc! name& at the heart of this *ricing strateg! is the sim*le #ut im*ortant conce*t E *rice elasticit! of eman G Pea+ an Off1Pea+ Pricing Pea+ an off1*ea+ *ricing an is common in the telecommunications in ustr!& leisure retailing an in the tra-el sector. Tele*hone an estination as a necessit! an the! are therefore li+el! to #e )illing an a#le to *a! a much higher *rice -er! close to

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electricit! com*anies se*arate mar+ets #! time9 There are three rates for tele*hone calls9 a a!time *ea+ rate& an an off *ea+ e-ening rate an a chea*er )ee+en rate. 0lectricit! su**liers also offer chea*er off1*ea+ electricit! uring the night. ,t off1*ea+ times& there is *lent! of s*are ca*acit! an marginal costs of *ro uction are lo) 7the su**l! cur-e is elastic8 )hereas at *ea+ times )hen eman is high& )e e.*ect that short run su**l! #ecomes relati-el! inelastic as the su**lier reaches ca*acit! constraints. , com#ination of higher eman an rising costs forces u* the *rofit ma.imising *rice. Thir %egree 7Multi1Mar+et8 Price %iscrimination This is the most fre2uentl! foun in-ol-es charging lin+e form of *rice iscrimination an ifferent ifferent *rices for the same *ro uct in

segments of the mar+et. The +e! is that thir

egree iscrimination is

irectl! to consumers( )illingness an a#ilit! to *a! for a goo or

ser-ice. It means that the *rices charge ma! #ear little or no relation to the cost of *ro uction. The mar+et is usuall! se*arate in t)o )a!s9 #! time or #! geogra*h!. 4or*le& e.*orters ma! charge a higher *rice in o-erseas mar+ets if eman is estimate to #e more inelastic than it is in home mar+ets. 555555555555555555555555555555555555555555555555555 2! ?$ite sho$t notes on the (ollo'ing ,%: M%$@et =em%nd S#hedule &: /e%@ Ao%d /$i#ing #: In#ome *l%sti#ity o( =em%nd Solution, %: M%$@et =em%nd S#hedule

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In economics & a mar+et eman sche ule is a ta#le that lists the 2uantit! of a goo all consumers in a mar+et )ill #u! at e-er! ifferent *rice. , mar+et eman sche ule for a *ro uct in icates that there is an in-erse relationshi* #et)een *rice an re*resentation of a eman 2uantit! eman e . The gra*hical a eman cur-e.The sche ule is calle

eman cur-e is the gra*h e*icting the relationshi* #et)een the *rice of a certain commo it!& an the amount of it that consumers are )illing an a#le to *urchase at that gi-en *rice. It is a gra*hic re*resentation of a eman sche ule. The eman cur-e for all consumers together follo)s from the eman cur-e of e-er! in i-i ual consumer9 the in i-i ual e together. %es*ite its name& it is not eman s at each *rice are a the com*! of the scenario. %eman cur-es are use to estimate #eha-iors in com*etiti-e mar+ets& an are often com#ine )ith su**l! cur-es to estimate the e2uili#rium *rice 7the *rice at )hich sellers together are )illing to sell the same amount as #u!ers together are )illing to #u!& also +no)n as mar+et clearing *rice8 an the e2uili#rium 2uantit! 7the amount of that goo or ser-ice that )ill #e *ro uce an #ought )ithout sur*lus;e.cess su**l! or shortage;e.cess eman 8 of that mar+et. In a mono*olistic mar+et& the eman cur-e facing the mono*olist is sim*l! the mar+et eman cur-e. Characteristics ,ccor ing to con-ention& the eman cur-e is ra)n )ith *rice on the -ertical an 2uantit! on the hori"ontal The function actuall! *lotte is the in-erse eman function. The eman cur-e usuall! slo*es o)n)ar s from left to rightH that is& it has a negati-e association . The negati-e slo*e is often referre to as the Ila) of eman I& )hich means *eo*le )ill #u! more of a ser-ice& *ro uct& or resource as its *rice falls. The eman cur-e is relate to the

al)a!s sho)n as a cur-e& #ut sometimes as a straight line& e*en ing on

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marginal utilit!! cur-e& since the *rice one is )illing to *a! e*en s on the utilit! . Jo)e-er& the eman irectl! e*en s on the income of an in i-i ual )hile the utilit! oes not. Thus it ma! change in irectl! ue to change in eman for other commo ities. %eman sche ule , eman sche ule is a ta#le that lists the 2uantit! of a goo a *erson )ill #u! at each ifferent *rice. The eman cur-e is a gra*hical e*iction of the relationshi* #et)een the *rice of a goo an the 2uantit! of the goo that a consumer )oul circumstances. The eman eman un er certain time& *lace an relationshi* can also #e e.*resse

mathematicall!9 K 5 f7PH L& Prg& Po*& M8 )here K is 2uantit! eman e & P is the *rice of the goo & Prg is the *rice of a relate goo & L is income& Po* is *o*ulation an M is the e.*ectation of some rele-ant future -aria#le such as the future *rice of the *ro uct. The semi1colon means that the arguments to its right are hel constant )hen the relationshi* is *lotte t)o1 imensionall! in 7*rice& 2uantit!8 s*ace. If one of these other -aria#les changes the eman cur-e )ill shift. 4or*le& if the *o*ulation increase then there )oul #e an out)ar 7right)ar 8 shift of the eman cur-e& since more consumers )oul mean higher eman . This shift is referre to as a change in eman . Mo-ements along the eman cur-e occur onl! )hen 2uantit! eman e changes in res*onse to a change in *rice. 5555555555555555555555555555555555555555555555555555 &: /e%@ Ao%d /$i#ing Pea+1loa *ricing is a *ricing techni2ue a**lie to *u#lic goo s. Instea of ifferent eman s for the same *u#lic goo & )e consi er the eman s for a *u#lic goo in ifferent *erio s of the a!& month or !ear& then

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fin ing the o*timal ca*acit! 72uantit! su**lie 8 an & after)ar s& the o*timal *ea+1loa *rices. This has *articular a**lications in *u#lic goo s such as *u#lic ur#an trans*ortation& )here a! eman 7*ea+ *erio 8 is usuall! much higher than night eman 7off1*ea+ *erio 8. B! su#tracting the marginal costs of o*eration from the original eman s )e fin the marginal #enefits of ca*acit!& )hich must then #e -erticall! aggregate an e2uate to the marginal cost of increasing ca*acit!. <ith the o*timal ca*acit! foun & the o*timal *ea+1loa *rices are foun #! a ing the marginal costs of o*eration to the marginal #enefit uring generate & in each *erio & #! the o*timal ca*acit!. It ma! ha**en& ho)e-er& that the o*timal ca*acit! is not full! use su**orte #! the *ea+ eman ers Pea+1loa *ricing is a *olic! of raising *rices )hen the eman for a ser-ice is at its highest. The most recent anal!sis of this *ricing *olic! stems from ,merican research in the :NA>s an :NB>s. Pea+1loa *ricing is often use #! electricit! an tele*hone utilities as a means of reflecting the in-estment the! ha-e ma e to meet *ea+ eman for their ser-ices. 5555555555555555555555555555555555555555555555555555 #: In#ome *l%sti#ity o( =em%nd Income elasticit! of eman measures the relationshi* #et)een a change in 2uantit! eman e an a change in income. The #asic formula for calculating the coefficient of income elasticit! is9 Percentage change in 2uantit! eman e of goo M i-i e #! the *ercentage change in real consumers6 income the off1*ea+ *erio . In that case& the ca*acit! e.*ansion )ill #e totall!

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Normal Goo s Normal goo s ha-e a *ositi-e income elasticit! of eman so as income rise more is eman at each *rice le-el. <e ma+e a istinction #et)een normal necessities an normal lu.uries 7#oth ha-e a *ositi-e coefficient of income elasticit!8. Necessities ha-e an income elasticit! of eman of #et)een > an O:. %eman rises )ith income& #ut less than *ro*ortionatel!. Often this is #ecause )e ha-e a limite this )oul #e the eman nee to consume a itional 2uantities of necessar! goo s as our real li-ing stan ar s rise. The class*les of for fresh -egeta#les& tooth*aste an ne)s*a*ers. %eman is not -er! sensiti-e at all to fluctuations in income in this sense total mar+et eman is relati-el! sta#le follo)ing changes in the )i er economic 7#usiness8 c!cle. Lu.uries on the other han are sai to ha-e an income elasticit! of

eman P O:. 7%eman rises more than *ro*ortionate to a change in income8. Lu.uries are items )e can 7an often o8 manage to o )ithout uring *erio s of #elo) a-erage income an confi ence to go ahea eman falling consumer confi ence. <hen incomes are rising strongl! an consumers ha-e the )ith #ig1tic+et$ items of s*en ing& so the for lu.ur! goo s )ill gro). Con-ersel! in a recession or

economic slo) o)n& these items of iscretionar! s*en ing might #e the first -ictims of ecisions #! consumers to rein in their s*en ing an re#uil sa-ings an househol financial #alance sheets. Man! lu.ur! goo s also eser-e the so#ri2uet of *ositional goo s$. These are *ro ucts )here the consumer eri-es satisfaction 7an utilit!8 not /ust from consuming the goo or ser-ice itself& #ut also from #eing seen to #e a consumer #! others. Inferior Goo s

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Inferior goo s ha-e a negati-e income elasticit! of eman . %eman falls as income rises. In a recession the eman for inferior *ro ucts might actuall! gro) 7 e*en ing on the se-erit! of an! change in income an also the a#solute co1efficient of income elasticit! of eman 8. 4or*le if )e fin that the income elasticit! of eman for cigarettes is 1>.@& then a CQ fall in the a-erage real incomes of consumers might lea to a :.CQ fall in the total eman for cigarettes 7ceteris *ari#us8.<ithin a gi-en mar+et& the income elasticit! of eman for -arious *ro ucts can -ar! an of course the *erce*tion of a *ro uct must iffer from consumer to consumer. The hugel! im*ortant mar+et for o-erseas holi a!s is a great*le to e-elo* further in this res*ect. <hat to some *eo*le is a necessit! might #e a lu.ur! to others. 4or man! *ro ucts& the final income elasticit! of eman might #e close to "ero& in other )or s there is a -er! )ea+ lin+ at #est #et)een fluctuations in income an s*en ing ecisions. In this case the real income effect$ arising from a fall in *rices is li+el! to #e relati-el! small. Most of the im*act on eman follo)ing a change in *rice )ill #e ue to changes in the relati-e *rices of su#stitute goo s an ser-ices. The income elasticit! of eman for a *ro uct )ill also change o-er time the -ast ma/orit! of *ro ucts ha-e a finite life1c!cle. Consumer *erce*tions of the -alue an esira#ilit! of a goo or ser-ice )ill #e influence not /ust #! their o)n e.*eriences of consuming it 7an the fee #ac+ from other *urchasers8 #ut also the a**earance of ne) *ro ucts onto the mar+et. Consi er the income elasticit! of eman for flat1screen color tele-isions as the mar+et for *lasma screens e-elo*s an the income elasticit! of eman for TR ser-ices *ro-i e through satellite ishes set against the gro)ing a-aila#ilit! an falling cost 7in nominal an real terms8 an integrate igital tele-isions.

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