Assignment: Managerial Economics

1. Discuss the relationship between Average Product and Marginal Product, and
Average Variable Cost and Marginal Cost.
Ans. Relationship between Average Product and Marginal Product:
1. In 1st case of production , both Marginal and Average Product go on increasing.
2. Average Product increase when Marginal Product is greater than it.
3. Average Product is maximum when the value of Marginal Product is equal to it.
4. Average Product decreases when Marginal Product is less than it.
5. Marginal Product can be zero but Average Product can never be zero.
6. In graph, Marginal Product Curve will always be on left hand side of Average
Product Curve.
Relationship between Average Variable Cost and Marginal Cost:
1. When TVC increases at a decreasing rate, both AVC and MC decrease, but
MC is less than AVC.
2. MC reaches its minimum point at the at which TVC reaches its inflection
point, at its minimum; MC is less than AVC.
3. For all output levels beyond minimum of AVC, both AVC and MC increase,
with MC rising at faster rate(MC lies above AVC).

2. State the Law of Demand. Explain with examples the difference in demand
curve for substitutes and complements.
Ans. Law of demand:

Law of Demand states that other things remaining same, Quantity demanded
increases with the fall in its price and Quantity demanded decreases with the
rise in its own price.
Difference in demand curve for substitutes and complements:
Substitutes Goods are those goods which can be used in place of some other
goods. Examples: TEA-COFFEE, RICE-WHEAT. In case of substitutes, the
relationship is positive because if the price of tea will increase, the demand of
coffee will increase and vice versa.
Where as
Complimentary Goods are those goods which are jointly used. Examples: PENINK, BREAD-BUTTER. In case of complimentary goods, the relationship is
negative because if the price of Bread will increase, the demand of butter will
decrease and vice versa.

3. What are the features of perfectly competitive market? Explain the perfectly
competitive industry when (a) firms enter the industry, (b) firms leave the
industry.
Ans. Perfect Competition Market:
It is a market situation in which there are large number of buyers and sellers
and each buyer and seller is a price taker. Therefore, there is always a
competition in the market.
Features of Perfect Competition Market:
1. Large number of buyer and seller.
2. Homogeneous Product.
3. Free Entry and Exit.
4. Factors of Production are perfectly mobile.

5. Perfect Knowledge of Market.

(a) Firms enter the industry: In case of super normal profit, more firms will join the
industry. As soon as the more firms will join, the supply will increase. The price of
the commodity is high when supply is less. But in this case, due to the joining of
more firms, the supply increases which slowly reduces the market price. Slowly,
the situation of Super Normal Profit decreases and is brought to the level of
Normal Profit. At this point, new industries will stop joining.

(b) Firms leave the industry: In case of Super Normal Loss, the existing firms tries
to move out of the industries, as the firms move out, the supply gradually
decreases increasing market price of that commodity. This process continues till
the situation of Normal Profit is reached.

4. How is the least cost combination arrived at with the help of isocost and isoproduct curves?
Ans. The least cost combination is arrived where the Isoquant Curve is tangent
to the Iso- Cost line. The point where Isoquant curve is tangent to Isocost line
can be considered as the point of maximum output.
Thus,
Slope of Isoquant = Slope of Iso Cost Line.
5. Write short notes on any four of the following :
(a) Profit maximization: Profit Maximization means maximizing the difference
between Total Revenue and Total Cost. Profit Maximisation is a situation where the
producer maximizes the profits and minimizes the loss.
(b) Price leadership: Price leadership means every firm which is selling the product
in the market must fix the price for their product after studying the present market

price. If the firm sets the value above market price, it will loose all the buyers. And on
the other hand, if a firm sets the value lower than the market price, it can get many
buyers.
(c) Barriers to entry: It means restricted entry of firms. Entry Barrier may be defined
as a cost of producing which must be borne by a firm seeking to enter an industry,but
is not borne by firms already in the industry.
(d) Marginal principle: for the concept of marginal principle, two conditions must be
fulfilled:
a) MR= MC.
b)MC should always be rising.