IMI Exam

ME ET HRM 19 Oct 10:00

Test Taken on: October 19, 2020 12:06:53 PM +05:30

Unique Id: 46559218 Finish State: Normal
 Section-wise Details

Section #1

MARKS SCORED

Score Percentage

ME ET HRM 0/1 0

ME ET HRM 0/2 0

ME ET HRM 0/1 0

Total 0/4 0

SUMMARY OF ATTEMPTS TIME TAKEN

1 59
hr min

This was untimed section.

TOTAL QUESTIONS

4 Incorrect
4
(Scored 0/4)
 Question-wise Details

Section #1

Question 1: Time: 29 Min 12 Sec Marks: 0/ 1

Happy Berries is a producer of fresh strawberries in Holland and is a part of a perfectly competitive market. Suppose we
represent the production function of strawberries by

Q (K, L) = 40K + 10L (5 Marks)

with two inputs where K = Capital and L = Labour.

The wages for labourers on strawberry farms cultivated by Happy Berries are 5 euros per hour. The rental rate of equipment used
on the farms has a rental rate of 10 euros per hour. Happy Berries currently employs 10 machines and 20 labourers.

i) Given the production function and a higher quantity demanded for next month, what is a key decision that the HR Manager can
take in the short run to meet the higher demand? (1 Mark)

ii) Given the information in the question, should the firm reallocate the resources between the two inputs in the long run? (2
Marks)

iii) In the long run, what is the condition that would ensure that the input combination is optimal? (2 Marks)
 Response:

i) Assuming that the capital is fixed in the short run and costs more, the HR manager can increase the labour to increase the
production until a point where the cost of hiring one extra labour is equal to the revenue generated by one extra unit of berries.
that is, Marginal cost = Marginal revenue.

ii)As given Q= 40K+10L

The current Efficiency of the firm is 600 units.
As the MPL = 10 and MPK = 40
So in the long run the firm should invest more in machines because they are giving better output as compared to the labour. One
extra labour is giving only 10 additional berries whereas 1 extra machine is giving 40 additional berries. So in the long run, the
firm should reallocate the resource for profit maximization and reach a point where MC = MR.

iii) As per the information given,

Marginal Product of Labour= MPL = 10
Marginal Product of Capital = MPK =40
We know that the optimal choice of the inputs is achieved when,
MPL/w = MPK/r
where w is the wage rate of labour and r is the rental rate of capital.
here, MPL/w = 10/5 = 2
MPK/r = 40/10 = 4
So the firm should follow this condition to get the optimal input combination.

Words : 215

Question 2: Time: 23 Min 49 Sec Marks: 0/ 1

 Unionization in an industry provides the workers to have a joint representation with their employers. It allows the workers to
engage in collective bargaining and negotiate on the wages that the employers will pay as well as the working conditions
provided. In the country, Winterfell, the shoe industry labour force has formed a union that is preventing the wages from falling
below a certain level, by threatening the employers to go on a strike.
( 6 Marks)

i) What kind of government intervention can this action of the trade union be compared to? (2 Marks)

ii) Based on your understanding from part (i), suggest whether this action by the union necessarily impacts the equilibrium in the
labour market? Elaborate. (2 Marks)

iii) As a HR manager at one of the big shoe manufacturing firms, what key argument can you use to convince the union and the
workers to not engage in this action? (2 Marks)

Response:

i) This action of the trade union can be compared to the price floor intervention of the government.
A price floor is a regulatory tool through which the government will set the minimum wages or the lower limit of the wages that
can be paid to the workers. The impact of the price floor depends on whether it is above or below the market equilibrium wage.

ii) It is not necessary that this action by trade union will impact the equilibrium in the labour market. If the price floor or the lower
limit of the wages is below the market equilibrium wage then there will be no impact on the equilibrium in the labour market, as it
won't have any binding effect. But, if the price floor is above the market equilibrium wage then there will be an upward movement
along the supply curve, and the quantity of labour in the market increases, and hence the market equilibrium will change.

iii) As an HR manager, I can convince the workers that the wages provide are similar to the market equilibrium and the necessary
changes in working conditions can be made. Apart from this, I can tell them that we can consider their points during the appraisal
period and genuine compensation and benefits will be given to them as per their performances.

Words : 221

Question 3: Time: 26 Min 55 Sec Marks: 0/ 1

 i) Suppose Orange Inc. sells MP3 players and initially has monopoly power because there are only a few close substitutes
available to consumers. As more types of MP3 players are introduced into the market, what happens to the magnitude of Lerner
Index for Orange Inc.? (3 Marks)

ii) Snip Inc. is a producer of hair trimmers. Amazon. Com has listed a product by Snip Inc. called ‘Barber Magic Hair Trimmer’ for
men at USD 12.99. An identical product by Snip Inc. called ‘Trim-a-Pet’ for pets has been listed on the pet-store site
Pawsstore.com at USD 6.99. What kind of price-discrimination is being practiced by Snip Inc.? Justify your answer.
(3 Marks)

Response:

i) Lerner Index = (P-MC)/P

Lerner index is defined as the measure of monopoly power calculates as an excess of price over marginal cost as a fraction of
price.
Also, the Lerner index can be expressed in terms of elasticity of demand faced by the firm.
L = -1/Ed
As more types of MP3 players are introduced in the market, the consumers have more choices and the quantity supplied
increases. As a result, the supply curve shifts rightwards. This causes a downward movement along the demand curve and thus
the price decreases. So the difference in the Price and MC decreases and thus the monopoly power decreases.
In terms of elasticity, as the new players enter the market the consumers get more substitute options, and thus the elasticity of
demand increases. Since the Lerner index is inverse of elasticity of demand thus the value of L decreases, which means that the
monopoly power decreases.

ii) Snip Inc. is practicing first-degree price discrimination. First-degree price discrimination is the practice of charging reservation
prices to each consumer. Reservation price is the maximum price a consumer is willing to pay for a good. In this situation, Snip
Inc. is charging the consumers based on the type of use of the product. Although they are selling similar products on both the
websites but they are practicing price discrimination by charging the consumers on Amazon higher by calling it a personal
grooming product, and as people are more willing to spend on themselves so the maximum price they are willing to pay for good
increases, thus Snip Inc. can charge a higher amount for it. While selling the same product for pets, they have considered the fact
that people might be less willing to spend on the pets and the price reservation is lower and thus charging lesser price from them
but still the reservation price for this consumer.

Words : 314

Question 4: Time: 39 Min 23 Sec Marks: 0/ 1

i) A new manager has been hired at Tecathlon, a well-known sports goods manufacturer and retailer. He suggests that
“diminishing returns to factor and diminishing returns to scale are one and the same thing”. Do you agree with him? Why or why
not. Explain your answer. (4 Marks)

ii) “No firm ever wants to operate in a perfectly competitive market since all firms earn zero economic profit in a perfectly competitive long-
run equilibrium.” Critically evaluate this statement. (4 Marks)

Response:

Diminishing returns to factor principle states that as the use of an input increases with other inputs and technology fixed, the
resulting additions to output will eventually decrease. This means that the marginal product of the factor of production declines as
the use of factor increases.
Diminishing Returns to scale is when the change in output is less than the change in all inputs, that is if the labour and capital are
doubled but the increase in output is less than double.
The two are not the same as diminishing returns to factor is in the short-run when only one input is changed and others being
constant. In this situation eventually, there is under utilization of that input and hence the marginal output starts decreasing.
Diminishing returns to scale, on the other hand, is in the long run when one or more or all factors of production are increases but
the increase in output is less as compared to inputs increased.
Diminishing returns to factor is the result of a change in only one input and thus eventually leads to under utilization of the input. If
there are technological and organizational improvements then diminishing returns to factor may not apply. Diminishing returns to
scale occurs when production is on a large scale and there are mismanagement and difficulty in organizing, coordinating, and
integrating the activities. So the cause of the two is not the same, although in both cases the Marginal Product declines.

ii) A market consists of all potential buyers and sellers. A perfectly competitive market is one where there are infinitely large
numbers of buyers and sellers and thus no firm has any influence on the price. The products sold are identical and are perfectly
suitable for one another and satisfy the consumers equally. The firms are free to enter and exit the market as there are no special
costs associated with it. The sellers and the buyers have perfect knowledge about the market. Since no individual firm has any
effect on price because of highly elastic demand, so each firm is a price taker and can thus maximize the profit only by deciding
the quantity to produce. In the long run, no firm has any incentive to enter or exit the market because all firms are earning zero
economic profit. The firms are earning zero economic profit because the entry of any new firm will increase the supply in the
market and thus the price will decrease and as a result, the market equilibrium price will decrease and the quantity will increase.
So if the new firms keep entering the market the price will go on decreasing and hence profit will keep reducing. Due to this
reason, no firm wants to operate in a perfectly competitive market in the long run, as this will eventually lead to a decrease in the
profits.

Words : 475