Mangerial Economics

1ANSWER:
The demand function relates price and quantity. It tells how many units of a good will be purchased at different prices. In general, at higher prices, less will be purchased. Thus, the graphical representation of the demand function (often referred to as the demand curve) has a negative slope. The market demand function is calculated by adding up all of the individual consumers' demand functions.

2ANSWER:
The practice of setting prices at different levels depending on the currency used to make the purchase. Dual pricing may be used to accomplish a variety of goals, such as to gain entry into a foreign market by offering unusually low prices to buyers using the foreign currency, or as a method of price discrimination. Dual pricing can also take place in different markets that use the same currency. This is closer to price discrimination than when dual pricing is implemented in foreign markets and different currencies. Dual pricing is not necessarily an illegal pricing tactic; in fact, it is a legitimate pricing option in some industries. However, dual pricing, if done with the intent of dumping in a foreign market, can be considered illegal.

3ANSWER:
Functional profit means that someone employed resources (capital) in a way that is more desired by consumers. It is also a reward for the risk associated with changing how that capital was employed. Losses tell the person that he didn't employ capital more efficiently, and he had better stop his wasteful use of it, or he'll incur more losses. Profit = entry, entry = more employment. entry continues until QS=QD and price is stable at that point.

4ANSWER:
The time value of money is the value of money with a given amount of interest earned or inflation accrued over a given amount of time. The ultimate principle suggests that a certain amount of money today has different buying power than the same amount of money in the future. This notion exists both because there is an opportunity to earn interest on the money and because inflation will drive prices up, thus changing the "value" of the money. The time value of money is the central concept in finance theory.

5ANSWER:
SHORT RUN: it is the concept that within a certain period of time, in the future, at least one input is fixed while others are variable. The short run is not a definite period of time, but rather varies based on the length of the firm's contracts. For example, a firm may have entered into lease contracts which fix the amount of rent over the next month, year or several years. Or the

firm may have wage contracts with certain workers which cannot be changed until the contract renewal. LONG RUN: A period of time in which all factors of production and costs are variable. In the long run, firms are able to adjust all costs, whereas in the short run firms are only able to influence prices through adjustments made to production levels. Additionally, whereas firms may be a monopoly in the short-term they may expect competition in the long-term. In economics, long-run models may shift away from short-turn equilibriums, in which supply and demand react to price levels with more flexibility.

6ANSWER:
Social Cost Analysis: Social cost benefit analysis is a part of calculating the merits of a project or a government policy. As the name suggests, social cost-benefit analysis of anything is associated with its social impact. This means that how a project or a policy will affect people is analyzed. Only after calculating the opportunity cost of a project, it is approved. The scope of social cost benefits can be applied to public investment and also to private investment. In case of public investment, it plays a major role in the economic development of a developing country. And, in case of private investments social cost benefit analysis is important as investments are to be sanctioned and are monitored by the government. There are two aspects of calculating the cost benefit analysis of any project. One is the private cost-benefit analysis and the other is social cost-benefit analysis. Though, social cost-benefit analysis is usually undertaken by the government. Financial Analysis: The process of evaluating businesses, projects, budgets and other financerelated entities to determine their suitability for investment. Typically, financial analysis is used to analyze whether an entity is stable, solvent, liquid, or profitable enough to be invested in. When looking at a specific company, the financial analyst will often focus on the income statement, balance sheet, and cash flow statement. In addition, one key area of financial analysis involves extrapolating the company's past performance into an estimate of the company's future performance.

7ANSWER:
Oligopoly is a situation in which only a few firms (sellers) are competing in the market for a particular commodity. The distinguishing characteristics of oligopoly are such that neither the theory of monopolistic competition nor the theory of monopoly can explain the behaviour of oligopolistic firm. These characteristics are briefly explained below: Under oligopoly the number of competing firms being small, each firm controls an important proportion of the total (industry) supply. Consequently, the effect of a change in the price or output of one firm upon the sales of its rival firms is noticeable and not insignificant. When any firm takes an action its rivals will in all probability react to it. (i.e., retaliate). The behaviour of oligopolistic firms is

interdependent and not independent or automistic as in the case under perfect or monopolistic competition. The demand curve of an individual firm under oligopoly is not known and is indeterminate because it depends upon the reaction of its rivals, which is uncertain. Each theory of oligopoly therefore makes a specific assumption about how rivals will (or will not) react to an individual firms action. In view of the uncertainty about the reaction of rivals and interdependence of behaviour, oligopolistic firms find its advantageous to co-ordinate their behaviour through explicit agreement (cartel) or implicit, hidden, understanding (collusion). Also because the number of firms is small, it is feasible for oligopolists to establish a cartel or collusive arrangement. However, it is difficult as well as expensive to monitor and enforce an agreement or understanding. Very few cartels last long particularly when oligopolistic firms significantly differ in their cost conditions. Under oligopoly, new entry is difficult. It is neither free nor barred. Hence the condition of entry becomes an important factor determining the price or output decisions of oligopolistic firms, and preventing or limiting entry an important objective. Given the indeterminacy of the individual firms demand and, therefore, the marginal revenue curve, oligopolistic firms may not aim at maximization of profits. Modern theories of oligopoly take into account the following alternative objectives of the firm: Sales maximization with profit constraint. Target or "fair" rate of profit and long-run stability. Maximization of the managerial utility function. Limiting (preventing) new entry. Achieving "satisfactory" profits, sales, etc. That is, the firm is a "satisficer" and not "maximizer". Maximization of joint (industry) profits rather than individual (firm) profits:

TWO UNIQUE ASPECTS OF OLIGOPOLY COMPETITION In oligopoly industries, competition occurs in ways that are unique to these industries. Two unique aspects of oligopoly competition are mutual interdependence and repeated interaction.

MUTUAL INTERDEPENDENCE Mutual interdependence exists when the actions of one firm has a major impact on the other firms in the industry. For instance, if Coke decides to sell more of its product (and to do so they reduce their prices), Pepsi will certainly notice that its sales fall. Coke's behavior affects Pepsi: mutual interdependence exists with in the US soft drink market. But, if a corn farmer in Kansas decides to plant another few more of corn, the sales of other corn farmers in the US will not be affected. An individual corn farmers' output is a very small part of US corn output; changes in output by one farmer will have no impact on the corn market. Mutual interdependence does not exist in the corn market. Mutual

interdependence exists within an oligopoly industry because each of the oligopolists has a sizable part of the market. As a consequence, when it changes its sales, its prices, or its marketing strategies, this oligopoly firm will likely affect the sales of other firms within the industry. An analogy is the following. If you are on a ocean liner that holds 1,000 people you can stand up and jump up and down and have no effect on the other passengers. This is because you are very, very small compared to the boat and to the number of other passengers on the boat. But, if you are in a small rowboat with 2 other people and you stand up the other 2 people will instantly notice that the boat is more unstable and, perhaps, threatens to capsize. They must actively shift their weight to keep the small boat from tipping over. The 3 people in the small row boat are mutually interdependent: what one person does can directly affect what happens to the other people on the boat.

REPEATED INTERACTION Often the oligopolists within an industry have been competing with one another for a long time. For instance, Pepsi and Coke have competed within the same market for decades. Ford, GM, and Chrysler have faced one another in the US auto market for a very long time. Oligopolists in other markets might have competed with one another for a much shorter period of time, perhaps only a few years. But, in each of these cases, the oligopolists within these industries have experience with the others within the industry. For instance, whenever Pepsi decides to lower the price of its products it knows how Coke responded in the past to previous reductions in price by Pepsi. Perhaps Coke matches a Pepsi price reduction 10 out of the past 12 times Pepsi reduced its prices. In this case, Pepsi likely anticipates that when it lowers its prices this time, the odds are that Coke will respond in kind. Coke, on its part, also remembers what happened in its past competitive interactions with Pepsi. Coke and Pepsi remember, and take into account, what happened in the past when they design their current competitive strategies. The situation is characterizes as "repeated interaction."

8ANSWER:
Some important techniques of managerial economics are: 1. Marginal and Incremental Principle This principle states that a decision is said to be rational and sound if given the firms objective of profit maximization, it leads to increase in profit, which is in either of two scenarios

If total revenue increases more than total cost. If total revenue declines less than total cost.

Marginal analysis implies judging the impact of a unit change in one variable on the other. Marginal generally refers to small changes. Marginal revenue is change in total revenue per unit change in output sold. Marginal cost refers to change in total costs per

unit change in output produced (While incremental cost refers to change in total costs due to change in total output). The decision of a firm to change the price would depend upon the resulting impact/change in marginal revenue and marginal cost. If the marginal revenue is greater than the marginal cost, then the firm should bring about the change in price. Incremental analysis differs from marginal analysis only in that it analysis the change in the firm's performance for a given managerial decision, whereas marginal analysis often is generated by a change in outputs or inputs. Incremental analysis is generalization of marginal concept. It refers to changes in cost and revenue due to a policy change. For example - adding a new business, buying new inputs, processing products, etc. Change in output due to change in process, product or investment is considered as incremental change. Incremental principle states that a decision is profitable if revenue increases more than costs; if costs reduce more than revenues; if increase in some revenues is more than decrease in others; and if decrease in some costs is greater than increase in others. 2. Equi-marginal Principle Marginal Utility is the utility derived from the additional unit of a commodity consumed. The laws of equi-marginal utility states that a consumer will reach the stage of equilibrium when the marginal utilities of various commodities he consumes are equal. According to the modern economists, this law has been formulated in form of law of proportional marginal utility. It states that the consumer will spend his money-income on different goods in such a way that the marginal utility of each good is proportional to its price, i.e., MUx / Px = MUy / Py = MUz / Pz Where, MU represents marginal utility and P is the price of good. Similarly, a producer who wants to maximize profit (or reach equilibrium) will use the technique of production which satisfies the following condition: MRP1 / MC1 = MRP2 / MC2 = MRP3 / MC3 Where, MRP is marginal revenue product of inputs and MC represents marginal cost. Thus, a manger can make rational decision by allocating/hiring resources in a manner which equalizes the ratio of marginal returns and marginal costs of various use of resources in a specific use. 3. Opportunity Cost Principle By opportunity cost of a decision is meant the sacrifice of alternatives required by that decision. If there are no sacrifices, there is no cost. According to Opportunity cost principle, a firm can hire a factor of production if and only if that factor earns a reward in that occupation/job equal or greater than its opportunity cost. Opportunity cost is the minimum price that would be necessary to retain a factor-service in its given use. It is also defined as the cost of sacrificed alternatives. For instance, a person chooses to

forgo his present lucrative job which offers him Rs.50000 per month, and organizes his own business. The opportunity lost (earning Rs. 50,000) will be the opportunity cost of running his own business. 4. Time Perspective Principle According to this principle, a manger/decision maker should give due emphasis, both to short-term and long-term impact of his decisions, giving apt significance to the different time periods before reaching any decision. Short-run refers to a time period in which some factors are fixed while others are variable. The production can be increased by increasing the quantity of variable factors. While long-run is a time period in which all factors of production can become variable. Entry and exit of seller firms can take place easily. From consumers point of view, short-run refers to a period in which they respond to the changes in price, given the taste and preferences of the consumers, while longrun is a time period in which the consumers have enough time to respond to price changes by varying their tastes and preferences. 5. Discounting Principle According to this principle, if a decision affects costs and revenues in long-run, all those costs and revenues must be discounted to present values before valid comparison of alternatives is possible. This is essential because a rupee worth of money at a future date is not worth a rupee today. Money actually has time value. Discounting can be defined as a process used to transform future dollars into an equivalent number of present dollars. For instance, $1 invested today at 10% interest is equivalent to $1.10 next year. FV = PV*(1+r)t Where, FV is the future value (time at some future time), PV is the present value (value at t0, r is the discount (interest) rate, and t is the time between the future value and present value.

9ANSWER:
Demand forecasting is the activity of estimating the quantity of a product or service that consumers will purchase. Demand forecasting involves techniques including both informal methods, such as educated guesses, and quantitative methods, such as the use of historical sales data or current data from test markets. Demand forecasting may be used in making pricing decisions, in assessing future capacity requirements, or in making decisions on whether to enter a new market. Criteria for a good demand forecasting

The following are the main criteria for demand forecasting. 1. Accuracy:

Accuracy is the most important criterion of a demand forecast, even though cent percent accuracy about the future demand cannot be assured. It is generally measured in terms of the past forecasts on the present sales and by the number of times it is correct. 2. Plausibility: The techniques used and the assumptions made should be intelligible to the management. It is essential for a correct interpretation of the results. 3.Simplicity: It should be simple, reasonable and consistent with the existing knowledge. A simple method is always more comprehensive than the complicated one. 4. Durability: Durability of demand forecast depends on the relationships of the variables considered and the stability underlying such relationships, as for instance, the relation between price and demand, between advertisement and sales, between the level of income and the volume of sales, and so on. 5. Flexibility: There should be scope for adjustments to meet the changing conditions. This imparts durability to the technique. 6. Availability of data: Immediate availability of required data is of vital importance to business. It should be made available on an up to date basis. There should be scope for making changes in the demand relationships as they occur. 7. Economy: It should involve lesser costs as far as possible. Its costs must be compared against the benefits of forecasts 8. Quickness: It should be capable of yielding quick and useful results. This helps the management to take quick and effective decisions.

10ANSWER:
A production function asserts that the maximum output of a technologically-determined production process is a mathematical production of input factors of production. Considering the set of all technically feasible combinations of output and inputs, only the combinations encompassing a maximum output for a specified set of inputs would constitute the production function. Alternatively, a production function can be defined as the specification of the minimum input requirements needed to produce designated quantities of output, given available technology. It is usually presumed that unique production functions can be constructed for every

production technology. By assuming that the maximum output technologically possible from a given set of inputs is achieved, economists using a production function in analysis are abstracting away from the engineering and managerial problems inherently associated with a particular production process. The engineering and managerial problems of technical efficiency are assumed to be solved, so that analysis can focus on the problems of allocative efficiency. The firm is assumed to be making allocative choices concerning how much of each input factor to use, given the price of the factor and the technological determinants represented by the production function. A decision frame, in which one or more inputs are held constant, may be used; for example, capital may be assumed to be fixed or constant in the short run, and only labour variable, while in the long run, both capital and labour factors are variable, but the production function itself remains fixed, while in the very long run, the firm may face even a choice of technologies, represented by various, possible production functions. The relationship of output to inputs is non-monetary, that is, a production function relates physical inputs to physical outputs, and prices and costs are not considered. But, the production function is not a full model of the production process: it deliberately abstracts away from essential and inherent aspects of physical production processes, including error, entropy or waste. Moreover, production functions do not ordinarily model the business processes, either, ignoring the role of management, of sunk cost investments and the relation of fixed overhead to variable costs. (For a primer on the fundamental elements of microeconomic production theory, see production theory basics). The primary purpose of the production function is to address allocative efficiency in the use of factor inputs in production and the resulting distribution of income to those factors. Under certain assumptions, the production function can be used to derive a marginal product for each factor, which implies an ideal division of the income generated from output into an income due to each input factor of production.

11ANSWER:
PRICE AND OUTPUT DETERMINATION UNDER MONOPOLY

The object of the monopolist is to earn maximum profit. The monopolist will charge such a price which will give him the maximum profit. He always compares marginal revenue with cost at its out put rate. The profit of firm is maximum when its MR = MC and Marginal cost curve cuts the marginal revenue curve from below. The MR curve in negatively sloped and it also lies below the AR curve at all levels of out put, except the first unit. The monopolist controls the whole market and no new firm can enter into the market so the distinction between a long run and short run is not necessary. The price and out put determination can be explained by the

following diagram :

EXPLANATION :- In this diagram AR curve is higher than the MR curve.The MC curve cuts the MR curve at a point E. Equilibrium occurs at a point E, where MR = MC. So the best level of out put for the monopolist firm is OF. As regards the determination of price monopolist fixes the price OP because the total revenue of the firm will be maximum at the equilibrium out put OF. The cost of the firm will be = OSEF The revenue of the firm will be = OPKF

12ANSWER:
Break even analysis is the relationship between cost volume and profits at various levels of activity, with emphasis being placed on the break even point. The break even point is where the business neither receive a profit nor a loss, this is when total money received from sales is equal to total money spent to produce the items for sale. Uses of a break even analysis Break even analysis enables a business organization to: 1. Measure profit and loses at different levels of production and sales. 2. To predict the effect of changes in price of sales. 3. To analysis the relationship between fixed cost and variable cost. 4. To predict the effect on profitablilty if changes in cost and efficiency.

In either of these situations, as a manager, you can then determine whether or not sales of that amount are feasible. EXAMPLE: Your company has total fixed cost of $300,000, and its average variable cost (variable cost per unit of output) is $2.00. In addition, you sell the good at a price of $5.00 per unit. The following steps are used to determine the breakeven point: 1. Set total revenue equal to total cost. Remember that total revenue equals price multiplied by the quantity sold, and total cost equals total fixed cost plus total variable cost.

2. Substitute AVCq for TVC. Recall that total variable cost equals average variable cost multiplied by the number of units produced q.

3. Subtract AVCq from both sides of the equation in Step 2 and simplify.

4. Divide both sides of the equation by (P AVC). This step enables you to solve for the breakeven quantity, q.

5. Substitute the values for TFC, P, and AVC and solve for q.

Your breakeven quantity is 100,000 units.

13ANSWER:
The resources of a business firm is invested in current and fixed assets. Current assets are acquired for the smooth running of business whereas fixed assets are purchased for generating revenue. The profitability of a firm depends upon the productive capacity of the fixed assets. Furthermore, the decision of investing in fixed assets has far-reaching impact because it requires huge capital for long period. The failure of any project may lead the firm in the door of liquidation. Therefore, the cost, benefit and probable risk of the proposed project should be analyzed systematically before making the investment. Capital budgeting decision comprises of three words 'Capital', 'Budgeting' and 'Decision'. Capital means the fund or resource available for investing. Budgeting is the numerical aspect of planning. Decision or decision making is the process of deciding whether alternative action is to be undertaken or not. In this way, capital budgeting decision is the process under which different investment alternatives are evaluated and the best alternative is selected. In other words, capital budgeting decision is concerned with the long-term investment decision i.e. making capital expenditure. The expenditure on fixed asset such as land and building, furniture and fixtures, plant and machinery etc. is called capital expenditure. The life of these fixed assets is more than one year. So, capital budgeting decision is concerned with long-term planning. Capital budgeting is also decision making process for an investment which includes the process of investment, evaluating, planning and financing major investment project of an organization. Therefore, it can be said that capital budgeting is concerned with the allocation of the firm's financial resources among the available investment alternatives. It is a part of long-term planning and comprises the evaluation and selection of investment projects. Risk is tangible; uncertainty is not. One can define risk, but one can barely delineate the outer layers of uncertainty. Risk can be rendered concrete; uncertainty cannot. We can identify risk like we do a distant train coming towards us or to a dog barking at us nearby. Of course, the train may change its course before it reaches us; it may slow down or stop altogether. The dog, for its part, may bark without doing anything beyond that. Risk, after all, is not the train which has killed us or the dog that has attacked us. Neither constitutes risk. Rather, the danger perceived to be looming whether close by or far away represents risk. The realized danger, so to speak, is no longer a risk.

Uncertainty on the other hand has too many unknown variables. To turn to the examples aforementioned, uncertainty would be akin to us not knowing if the train has already left the station; and if it has, whether it would be using tracks leading our way. Uncertainty would be like knowing there is a dog somewhere in the neighborhood without us having a clue as to whether it would be heading towards us. It might not bark at us at all.