Master of Business Administration - MBA Semester I MB0042 Managerial Economics - 4 Credits

(Book ID: B0908) Assignment Set- 1 ( 60 Marks) Note: Each question carries 10 Marks. Answer all the questions. Q.1 Price elasticity of demand depends on various factors. Explain each factor with the help of an example. Q.2 A company is selling a particular brand of tea and wishes to introduce a new flavor. How will the company forecast demand for it ? Q.3 The supply of a product depends on the price. What are the other factors that will affect the supply of a product. Q.4 Show how producers equilibrium is achieved with isoquants and isocost curves. Q.5 Discuss the full cost pricing and marginal cost pricing method. Explain how the two methods differ from each other. Q.6 Discuss the price output determination using profit maximization under perfect competition in the short run. [Type text] [Type text] Feb drive 2011

Price Elasticity of Demand

An important aspect of a product's demand curve is how much the quantity demanded changes when the price changes. The economic measure of this response is the price elasticity of demand. Price elasticity of demand is calculated by dividing the proportionate change in quantity demanded by the proportionate change in price. Proportionate (or percentage) changes are used so that the elasticity is a unit-less value and does not depend on the types of measures used (e.g. kilograms, pounds, etc). As an example, if a 2% increase in price resulted in a 1% decrease in quantity demanded, the price elasticity of demand would be equal to approximately 0.5. It is not exactly 0.5 because of the specific definition for elasticity uses the average of the initial and final values when calculating percentage change. When the elasticity is calculated over a certain arc or section of the demand curve, it is referred to as the arc elasticity and is defined as the magnitude (absolute value) of the following: Q2 - Q1 ( Q1 + Q2 ) / 2 P2 - P1 ( P1 + P2 ) / 2

where

Q1 Q2 P1 P2

= = = =

Initial quantity Final quantity Initial price Final price

The average values for quantity and price are used so that the elasticity will be the same whether calculated going from lower price to higher price or from higher price to lower price. For example, going from $8 to $10 is a 25% increase in price, but going from $10 to $8 is only a 20% decrease in price. This asymmetry is eliminated by using the average price as the basis for the percentage change in both cases. For slightly easier calculations, the formula for arc elasticity can be rewritten as: ( Q2 - Q1 ) ( P2 + P1 ) ( Q2 + Q1 ) ( P2 - P1 ) To better understand the price elasticity of demand, it is worthwhile to consider different ranges of values. Elasticity > 1 In this case, the change in quantity demanded is proportionately larger than the change in price. This means that an increase in price would result in a decrease in revenue, and a decrease in price would result in an increase in revenue. In the extreme case of near infinite elasticity, the demand curve would be nearly horizontal, meaning than the quantity demanded is extremely sensitive to changes in price. The case of infinite elasticity is described as being perfectly elastic and is illustrated below:

Availability of substitutes: the more possible substitutes, the greater the elasticity. Note that the number of substitutes depends on how broadly one defines the product. Degree of necessity or luxury: luxury products tend to have greater elasticity. Some products that initially have a low degree of necessity are habit forming and can become "necessities" to some consumers. Proportion of the purchaser's budget consumed by the item: products that consume a large portion of the purchaser's budget tend to have greater elasticity. Time period considered: elasticity tends to be greater over the long run because consumers have more time to adjust their behavoir. Permanent or temporary price change: a one-day sale will elicit a different response than a permanent price decrease. Price points: decreasing the price from $2.00 to $1.99 may elicit a greater response than decreasing it from $1.99 to $1.98.

Master of Business Administration - MBA Semester I MB0042 Managerial Economics - 4 Credits

(Book ID: B0908) Assignment Set- 2 (60 Marks) Note: Each question carries 10 Marks. Answer all the questions. Q.1 Income elasticity of demand has various applications. Explain each application with the help of an example. Q.2 When is the opinion survey method used and what is the effectiveness of the method. Q.3 Show how price is determined by the forces of demand and supply, by using forces of equilibrium. Q.4 Distinguish between fixed cost and variable cost using an example. Q.5 Discuss Marris Growth Maximization model and show how it is different from the Sales maximization model. Q.6 Explain how fiscal policy is used to achieve economic stability

Q1
The Income Elasticity of Demand measures the rate of response of quantity demand due to a raise (or lowering) in a consumers income. The formula for the Income Elasticity of Demand (IEoD) is given by: IEoD = (% Change in Quantity Demanded)/(% Change in Income)

Calculating the Income Elasticity of Demand

On an assignment or a test, you might be asked "Given the following data, calculate the income elasticity of demand when a consumer's income changes from $40,000 to $50,000". (Your course may use the more complicated Arc Income Elasticity of Demand formula. If so you'll need to see the article on Arc Elasticity)Using the chart on the bottom of the page, I'll walk you through answering this question. The first thing we'll do is find the data we need. We know that the original income is $40,000 and the new price is $50,000 so we have Income(OLD)=$40,000 and Income(NEW)=$50,000. From the chart we see that the quantity demanded when income is $40,000 is 150 and when the price is $50,000 is 180. Since we're going from $40,000 to $50,000 we have QDemand(OLD)=150 and QDemand(NEW)=180, where "QDemand" is short for "Quantity Demanded". So you should have these four figures written down: Income(OLD)=40,000 Income(NEW)=50,000 QDemand(OLD)=150 QDemand(NEW)=180 To calculate the price elasticity, we need to know what the percentage change in quantity demand is and what the percentage change in price is. It's best to calculate these one at a time.

Calculating the Percentage Change in Quantity Demanded

The formula used to calculate the percentage change in quantity demanded is: [QDemand(NEW) - QDemand(OLD)] / QDemand(OLD) By filling in the values we wrote down, we get: [180 - 150] / 150 = (30/150) = 0.2 So we note that % Change in Quantity Demanded = 0.2 (We leave this in decimal terms. In percentage terms this would be 20%) and we save this figure for later. Now we need to calculate the percentage change in price.

Calculating the Percentage Change in Income

Similar to before, the formula used to calculate the percentage change in income is: [Income(NEW) - Income(OLD)] / Income(OLD) By filling in the values we wrote down, we get: [50,000 - 40,000] / 40,000 = (10,000/40,000) = 0.25 We have both the percentage change in quantity demand and the percentage change in income, so we can calculate the income elasticity of demand.

Final Step of Calculating the Income Elasticity of Demand

We go back to our formula of: IEoD = (% Change in Quantity Demanded)/(% Change in Income) We can now fill in the two percentages in this equation using the figures we calculated earlier. IEoD = (0.20)/(0.25) = 0.8 Unlike price elasticities, we do care about negative values, so do not drop the negative sign if you get one. Here we have a positive price elasticity, and we conclude that the income elasticity of demand when income increases from $40,000 to $50,000 is 0.8.

How Do We Interpret the Income Elasticity of Demand?

Income elasticity of demand is used to see how sensitive the demand for a good is to an income change. The higher the income elasticity, the more sensitive demand for a good is

to income changes. A very high income elasticity suggests that when a consumer's income goes up, consumers will buy a great deal more of that good. A very low price elasticity implies just the opposite, that changes in a consumer's income has little influence on demand. Often an assignment or a test will ask you the follow up question "Is the good a luxury good, a normal good, or an inferior good between the income range of $40,000 and $50,000?" To answer that use the following rule of thumb:

If IEoD > 1 then the good is a Luxury Good and Income Elastic If IEoD < 1 and IEOD > 0 then the good is a Normal Good and Income Inelastic If IEoD < 0 then the good is an Inferior Good and Negative Income Inelastic

In our case, we calculated the income elasticity of demand to be 0.8 so our good is income inelastic and a normal good and thus demand is not very sensitive to income changes. Next: Cross-Price Elasticity of Demand

Data
Income $20,000 $30,000 $40,000 $50,000 $60,000 Quantity Demanded 60 110 150 180 200

Types of Elasticity

A Beginner's Guide to Price Elasticity Price Elasticity of Demand Price Elasticity of Supply

More Types of Elasticity

Income Elasticity of Demand Cross Price Elasticity of Demand Arc Elasticity

Economics Resources

Economics from A-to-Z Economics Glossary Macroeconomics Help

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Assignment
Q.1 Write a note on the managerial roles and skills? According to Mintzberg (1973), managerial roles are as follows:1. Informational roles2. Decisional roles3. Interpersonal roles 1. Informational roles: This involves the role of assimilating and disseminating information as and when required.Following are the main sub-roles, which managers often perform:a. Monitor collecting information from organizations, both from inside and outside of the organizationb. Disseminator communicating information to organizational membersc. Spokesperson representing the organization to outsiders 2. Decisional roles: It involves decision making. Again, this role can be sub-divided in to the following:a. Entrepreneur initiating new ideas to improve organizational performanceb. Disturbance handlers taking corrective action to cope with adverse situationc. Resource allocators allocating human, physical, and monetary resourcesd. Negotiator negotiating with trade unions, or any other stakeholders 3. Interpersonal roles: This role involves activities with people working in the organization. This is supportive role forinformational and decisional roles.Interpersonal roles can be categorized under three sub-headings:a. Figurehead Ceremonial and symbolic roleb. Leadership leading organization in terms of recruiting, motivating etc.c. Liaison liasoning with external bodies and public relations activities.Management Skills: Katz (1974) has identified three essential management skills: technical, human, and conceptual. Technical skills: The ability is to apply specialized knowledge or expertise. All jobs require some specialized expertise,and many people develop their technical skills on the job. Vocational and on-the-job training programs can be used todevelop this type of skill. Human Skill: This is the ability to work with, understand and motivate other people (bothindividually and a group). This requires sensitivity towards others issues and concerns. People who are proficient intechnical skill, but not with interpersonal skills, may face difficulty to manage their subordinates. To acquire the HumanSkill, it is pertinent to recognize the feelings and sentiments of others, ability to motivate others even in adversesituation, and communicate own feelings to others in a positive and inspiring way. Conceptual Skill:

This is an ability to critically analyze, diagnose a situation and forward a feasible solution. It requirescreative thinking, generating options and choosing the best av Tisha s moderately high score on this factor shows that though she will be accommodate others view, she will expect herviews also to be taken into consideration. She is likely to trust her subordinates more. N euroticism This factor involves a high likelihood to get angry and have other negative emotions like anxiety. In most cases, thischaracteristic is linked to emotional instability. Individuals scoring low on neuroticism will experience bouts of moodswings triggered by frustrations by minor issues at the workplace (Grucza et al.2007). Tisha s low score on this factorshows she will be more likely to cope with problems as a manager and she will tend to be calmer while handling difficultsituations. Q.4 What are the different factors influencing perception? Perception is our sensory experience of the world around us and involves both the recognition of environmental stimuliand action in response to these stimuli. Through the perceptual process, we gain information about properties andelements of the environment that are critical to our survival.A number of factors operate to shape and sometimes distort perception These factors can reside:i) In the perceiverii) In the O bject or target being perceived oriii) In the context of the situation in which the perception is made.1. Characteristics of the Perceiver: Several characteristics of the perceiver can affect perception. When an individuallooks at a target and attempts to interpret what he or she stands for, that interpretation is heavily influenced bypersonal characteristics of the individual perceiver. The major characteristics of the perceiver influencing perception are:a) Attitudes: The perceivers attitudes affect perception. For example, Mr. X is interviewing candidates for a veryimportant position in his organization - a position that requires negotiating contracts with suppliers, most of whom aremale. Mr. X may feel that women are not capable of holding their own in tough negotiations. This attitude withdoubtless affect his perceptions of the female candidates he interviews.b) Moods : Moods can have a strong influence on the way we perceive someone. We think differently when we arehappy than we do when we are depressed. In addition, we remember information that is consistent with our mood statebetter than information that is inconsistent with our mood state. When in a positive mood, we form more positiveimpressions of other. When in a negative mood, we tend to evaluate others unfavorably.c) Motives: Unsatisfied needs or motives stimulate individuals and may exert a strong influence on their perceptions. Forexample, in an organizational context, a boss who is insecure perceives a sub ordinate's efforts to do an outstanding jobas a threat to his

or her own position. Personal insecurity can be translated into the perception that others are out to"get my job", regardless of the intention of the subordinates.d) Self - Concept: Another factor that can affect social perception is the perceivers self-concept. An individual with apositive self-concept tends to notice positive attributes in another person. In contrast, a negative self-concept can lead aperceiver to pick out negative traits in another person. Greater understanding of self allows us to have more accurateperceptions of others.e) Interest: The focus of our attention appears to be influenced by our interests. Because our individual interests differconsiderably, what one person notices in a situation can differ from what other perceive. For example, the supervisor who has just been reprimanded by his boss for coming late is more likely to notice his colleagues coming late tomorrowthan he did last week.f) Cognitive structure: Cognitive structure, an individual's pattern of thinking, also affects perception. Some people havea tendency to perceive physical traits, such as height, weight, and appearance, more readily. Cognitive complexity allowsa person to perceive multiple characteristics of another person rather than attending to just a few traits.g) Expectations: Finally, expectations can distort your perceptions in that you will see what you expect to see. Theresearch findings of the study conducted by Sheldon S Zalking and Timothy W Costello on some specific characteristicsof the perceiver reveali) Knowing oneself makes it easier to see others accurately.ii) O ne's own characteristics affect the characteristics one is likely to see in other.iii) People who accept themselves aremore likely to be able to see favorable aspects of other people.iv) Accuracy in perceiving others is not a single skill.These four characteristics greatly influence how a person perceives other in the environmental situation.2) Characteristics of the Target : Characteristics in the target that is being observed can affect what is perceived. Physicalappearance pals a big role in our perception of others. Extremely attractive or unattractive individuals are more likely tobe noticed in a group than ordinary looking individuals. Motions, sound, size and other attributes of a target shape theway we see it. Verbal Communication from targets also affects our perception of them. Nonverbal communicationconveys a great deal of information about the target. The perceiver deciphers eye contact, facial expressions, bodymovements, and posture all in attempt to form an impression of the target.3) Characteristics of the Situation: The situation in which the interaction between the perceiver and the target takesplace, has an influence on the perceivers impression of the target. The strength of the situational cues also affects socialperception. Some situations provide strong cues as to appropriate behavior. In this situation, we assume that + i.eindividual's behaviors can be accounted for by the situation, and that it may not reflect the individual's disposition. Q.5 Write a note on contemporary work cohort?

Contemporary Work CohortContemporary Work Cohort, proposed by Robbins (2003) divides the work force into different groups depending on theera or period in which they have entered into work. It stresses upon individuals values which reflect the societal valuesof the period in which they grew up. The cohorts and the respective values have been listed below: 1. Veterans - Workers who entered the workforce from the early 1940s through the early 1960s and exhibited thefollowing value orientations:1. They were influenced by the Great Depression and World War II2. Believed in hard work3. Tended to be loyal to their employer4. Terminal values: Comfortable life and family security 2. Boomers - Employees who entered the workforce during the 1960s through themid1980s belonged to this categoryand their value orientations were:a. Influenced heavily by John F. Kennedy, the civil rights and feminist movements, the Beatles, the Vietnam War, andbaby boom competition.b. Distrusted authority, but gave a high emphasis on achievement and material success.c. O rganizations who employed them were vehicles for their careers.d. Terminal values: sense of accomplishment and social recognition.3. Xers - began to enter the workforce from the mid1980s.They cherished the following values:a. Shaped by globalization, two career parents, MTV, AIDS, and computers.b. Value flexibility, life options, and achievement of job satisfaction.c. Family and relationships were important and enjoyed team oriented work.d. Less willing to make personal sacrifices for employers than previous generations.e. Terminal values: true friendship, happiness, and pleasure4.Ne xte rs - most recent entrants into the workforce.a. Grew up in prosperous times, have high expectation, believe in themselves, and confident in their ability to succeed.b. Never ending search for ideal job; see nothing wrong with job hopping.c. Seek financial success.d. Enjoy team work, but are highly self reliant.e. Terminal values: freedom and comfortable life. Q.6 What are the special issues in motivation? Discuss Some of the special issues in motivation are discussed below. Motivating Professionals The professional employees likely to seek more intrinsic satisfaction from their work than blue-collar employees. Theygenerally have strong and long term commitments to their field of expertise are perhaps more loyal to their professionthan to their employer. They need to regularly update their knowledge, and their commitment to their profession.Therefore, extrinsic factors such as money and promotions would be low on their priority list. Rather, job challengetends to be ranked high. They like to tackle problems and find solutiailable