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Q: 1) What are the basic or fundamental concept of managerial economics? Discuss any five
of these with illustrations.
Answer: Managerial economics is that branch of science in which economic theories are used
in taking business decisions and formulates future plans. Managerial economics is an applied
branch of economic science. According to McGuigan and Moyer, “Managerial economics
deals with the application of economic theory and methodology to decision – making problems
faced by public, private and not-for-profit institutions. Managerial economics extracts from
economic theory those concepts and techniques that enable the decision maker to allocate
efficiently the resources of the organization.” Thus, Managerial economics is a discipline which
deals with the application of economic theory to business operation.
Five of these fundamental concepts given above are discussed below with illustrations: -
Thus, a manager at the time of taking decision should consider the use of
additional unit and try to find out the additional benefit deriving from the employment of
additional unit.
We can analyze this concept with an example. Suppose a firm is a multimarket seller like Titan
watch which sells watches in both home market and foreign market. If marginal revenue from a
watch sold in home market exceeds the marginal revenue from a watch sold in the foreign
market, the firm is likely to reduce the sale of watch in the foreign market and increase the sales
in home market for higher revenue. This process will continue till the marginal revenue from
both market are equalized. In the same way when the wage rate of the workers is high in a
particular factory the mobility of labour will be higher in that factory and ultimately the wage
rate of all the factories will be equal. This is what we call equi-marginalism. This concept is very
important while the management is employing various factors of production.
4) TIME PERSPECTIVE: - Past, present and future time dimension are very important
for decision making purpose. The economists consider this concept like temporary run, short run
and long run period. In temporary period the supply of output is totally fixed, but in the short run
period the supply of goods can be changed slightly by altering factor proportion. In the long run
period all factors are variable and therefore output level can be adjusted according to the needs
of the society. In short run period managers face a lot of problems but in the long run period
there are no constraints for increasing or decreasing production by the management. The short
run is the present period whereas long run is the future period. A manager has to calculate the
opportunity cost of his decision if he has to choose present and future course of action.
Therefore, it is important for the manager to take a decision for short or long run period.
For example- a person is offered a gift of Rs. 1000 today or Rs. 1000 after a year.
What will be his option for taking the gift today or after a year. Naturally the person will choose
Rs. 1000 today. This is due to the risk and uncertainty in the future period. Moreover the person
who is receiving Rs. 1000 today can invest Rs. 1000 at the rate of 10 percent interest, so that
after a year he will be getting Rs. 1100. In this case we can say that the present value of Rs. 1100
is just Rs. 1000.
P/V = Rs.1100\1+i
P=
3rd year, P =
This discounting principle has application in areas rather than investment decisions. “If a
decision affects cost and revenue at future dates it is essential to discount those costs and
revenues to present value before a valid comparison of alternatives is possible”. With the help of
this concept investment appraisal can be done by the investor.
Q2) Discuss briefly different cost concept relevant to managerial decision of passing and
control.
Answer: There are several cost concepts and a clear understanding of them is necessary for
managerial decision making. Some of the important costs concepts are discussed below: -
1. ECONOMIC COST AND REAL COST: - The economic cost refers to the payment a firm
must make to resources employed by it to manufacture or produce some goods. The
resources may be either hired or owned by the firm itself. In the former case, payments are to
be made to outsiders and this is known as explicit cost. When the resources are owned by the
producer himself there is no need of such payment to any one, but in economics it is treated
as a part of cost and known as implicit cost or opportunity cost. The opportunity cost of
doing one thing is the next best alternative foregone. For example, the opportunity cost of
using one’s own capital in the business is the interest it could have earned by depositing in a
bank.
3. FIXED AND VARIABLE COSTS: - There are some costs which do not vary with the level
of output in short-run period, while some other cost varies with the level of output. The
former are called ‘fixed costs’ and the latter ‘variable costs’. Interests on capital, rent etc are
example of fixed costs while wages and salaries, costs of raw materials, power, etc are
example of variable costs. Fixed costs are irrelevant for decision making in short-run while
variable cost are relevant.
4. TOTAL COST, AVERAGE COST AND MARGINAL; COST: - Total cost refers to the
overall cost needed to produce a given level of output. Total cost rises as output rises. Total
cost is the sum total of total fixed costs and total variable costs. The per unit costs i.e., total
cost divided by total output is the average cost. Marginal cost is the additional cost incurred
to produce one additional unit of output. Thus, it is the increase in total cost as output
increases by one unit.
The total cost concept is useful for break – even and profit analysis, average cost concept
for estimating profit margin per unit of sales and the marginal cost for deciding the optimum
level of output.
5. INCREMENTAL AND SUNK COST:- Incremental cost are the cost incurred on
acceptance of a decision while sunk costs are the costs already incurred and have nothing to
do with the decision. The costs relevant for decision making are incremental costs only while
sunk costs are irrelevant for decision making. Suppose firm has a plant having a production
capacity of 500 units per week which it had bought for Rs.5, 00,000. If the firm wants to
increase its output to 300 units per week from 100 units per week at present, the additional
cost it would requires is estimate at Rs.20,000/-. Therefore, the incremental cost would be
Rs.20, 000/- and sunk cost would be Rs.5, 00,000.
6 PRIVATE AND SOCIAL COST: - Private costs are incurred directly by the
individuals or firms engaged actively while social costs are the cost incurred by the
society. There are costs like taxes, which are the costs to the firm but not society.
Similarly, there are costs which are costs to the society but not firm like noise
pollution or water pollution caused by individuals or firms. This distinction is
important in making cost- benefit analysis of a project. However, individual firms
may not consider social cost in evaluating their projects.
PAPER – II
Q1) Discuss the GAAPs as has been applicable in Indian context. What is the commonly
acceptable structure of GAAP in India?
Answer: Generally Accepted Accounting principles (GAAP) are a guide to the accounting
profession in the choice of accounting techniques and the preparation of financial statements
(APB No. 4, AICPA, USA). These principles have been developed gradually through practice.
Experience, reason, custom, usage and practical necessity have contributed significantly in the
evolution of GAAP. For this, the GAAPs change in response to the changes in the economic and
social conditions, to new knowledge and technology, and to the demands of users for more
serviceable financial information.
Structure of GAAP:
The structure of GAAP refers to the forms of elements of GAAP. Traditionally, these are known
by various names, viz., assumptions, principles, concepts, conventions, etc. based on the recent
development in the theory base of accounting, the traditional structure of GAAP has been
modified into the following four broad heads:
a) Assumptions: - Assumptions are traditions and customs developed over a period of time
and well accepted by the accounting profession. The following five assumptions are
considered as basic assumptions of accounting. These are:
1) Accounting Entity,
2) Accrual,
3) Going Concern,
4) Money Measurement; and
5) Accounting Period.
b) Principles: - Basic accounting principles are the general decision rules which govern the
development of accounting techniques. Following are the basic accounting principles: -
1) Dual aspects,
2) Revenue recognition,
3) Cost,
4) Matching,
5) Full Disclosure; and
6) Objectivity
c) Modifying Principles: - Generally, the financial statements are prepared keeping in view
the basic principles and assumptions of accounting. Following are the basic constraints of
modifying principles: -
1) Materiality,
2) Conservatism (prudence),
3) Cost-benefit,
4) Timeliness,
5) Consistency,
6) Substance over Legal form ; and
7) Industry practice
d) Accounting Standards: - These are the established and accepted models which aim at
providing excellent, adequate and unbiased treatment of accounting
transaction/information and reporting the same in the financial statements to facilitate
their users in forming rational and judicious decision. There are 29 Accounting
Standards. They are as AS-1, AS-2…AS-29 with different topics of accounting.
Answer: Profitability is defined as the profit earning capacity of an organization with reference
to either sales or investment or assets used. It is considered for various purposes. The primary
objective of any business house is to earn profit. It is a test of business efficiency. In this context
profit is interpreted in two senses-------‘profit” in absolute sense and ‘profitability relative sense.
Profit is expressed as net earning before tax and profitability is expressed in relation to another
variable, e.g., return on investment is 20 p.c., or net profit to sale ratio is 25 p.c., etc. Both
concepts are important for financial decision investment decision and for measurement of
managerial performance.
Q1) What is organizational culture? What are the factors that have bearing on organizational
culture?
“Organizational culture is relatively uniform perception held of the organization, it has common
characteristics, it is descriptive, it can distinguish one organization from another and it integrates
individual, group and organization system variables.”
1. Objectives setting: - Culture mould people and people are the basic building blocks of an
organization. The objectives of a business organization may be maximization of profit
but the same objective may be unworthy for other individuals depending upon cultural
differences.
2. Motivational pattern: - Motivational pattern develops from a person’s family and
educational background and national cultures. The knowledge of cultural pattern and its
motivational impact leads a manager to adopt his motivational strategy appropriately.
3. Work Ethic: - Ethics refers to conformity to principles of human conduct. Work Ethic
has its origin in religious and secular values. People work hard for the maintenance of
their life; they attach meaning and importance to work.
4. Control: - Controlling is a dynamic process involving action which is either restraining,
stimulating or adaption.
Abraham H. Maslow (1908-1970) propagated the need theory, which is one of the most
important theories of motivation in management.
The behavior of an individual at any point of time is affected by his strongest need.
Human being tends to satisfy their basic needs and move on to higher needs. A.H.Maslow, a
famous social scientist, has propagated hierarchy into which human needs are arranged as shown
in the diagram below-.
Self
Actualization
Esteem
Social
Safety
Physiological
He formulated that within every human being, there exits hierarchy of five needs. They are –
1) PHYSIOLOGICAL: - They are the unlearned primary needs. Hunger thirst, shelter, sex,
and other bodily needs area classified in this category. Once these needs are satisfied,
they no longer motivate. The individual then seeks for next higher level of needs.
2) SAFETY: - Safety needs includes security and protection from physical and emotional
harm. This is the second level in needs hierarchy. This can be associated with security
needs also. Like physiological needs, once safety needs are satisfied they fail to motivate
further.
3) SOCIAL: - Affection, belongingness, acceptance and friendship are the social needs.
4) ESTEEM NEEDS: - Esteem needs are internal esteem factors such as self-respect
autonomy, and achievement and external esteem factors such as status, recognition and
attention. These are the higher level needs of human being. Maslow pointed out that it
includes self esteem & esteem for others.
Maslow’s theory is based on assumptions that human needs are hierarchical and people often
desire to satisfy their basic needs first and then move on to higher needs. But this raises a basic
question. Is need hierarchy rigid? Does every person try to satisfy his needs according to this
model? But in realty it is not so.
Maslow’s Theory has been critised on various grounds. Some of them are focused below: -
1) With the limited resources in hand every person is to satisfy his needs in some order.
However, this order may not follow Maslow’s need hierarchy.
i) Some people may be deprived of their lower order needs but may like to fulfill
their self-actualization needs.
ii) A person who sets importance to self-esteem needs may try to fulfill those before
the basic needs.
2) This is a subjective matter that a person tries for his higher level need when his lower
order need is reasonably satisfied. Thus, the level of satisfaction for a particular need may
differ from person to person.
HERZBERG’S Motivation Theory: -
Frederick Herzberg’s Theory is also called the dual factor theory and the Motivation-hygiene
theory of motivation. The theory was originally derived by analyzing “critical indents” written
by 200 engineers and accountants in nine different companies in Pittesburg area USA, Herzburg
and his associates conducted interview with the professional and asked them what they liked or
disliked about their work. The research approach was simplistic and built around many
questions. From this Herzberg concluded that people have two different categories of needs that
are essentially independent of each other and affect behavior in different ways Herzberg called
the first category of needs.
1. Hygiene or Maintenance Factors: -Hygiene factors describe people’s environment and
serve the primary function of preventing job dissatisfaction, maintenance because they
are never completely satisfied, they have to continue Herzberg emerged that there are ten
maintenance or hygiene factors. These are company policy and administration, technical
supervision, inter-personal relationship with supervisors, salary, job, and status. These
maintenance factor are also called dissatisfiers, since any increase in them will not affect
employee’s level of satisfaction, these are of no use for motivating them.
2. Motivational Factors: - Herzberg called it is the second category of needs motivators
since they seemed to be effective in motivating people to superior performance. Herzberg
includes six factors that motivate employees, these are achievements, recognition,
advancement, work itself, possibility of growth and responsibility. An increase in these
factors will motivate employees.
Herzberg consolded that individual may be classified into two parts: -
a) Motivation seeker, which are generally individuals who are primarily motivated by
the ‘satisfiers’ such as advancement achievement and other factors associated with
work itself.
b) Maintenance seeker, which are tend to be more concerned with factors such as
supervision, pay, etc...
Hygiene Factors
Motivators
1. Job satisfaction and dissatisfaction are two opposite points on a single continuum.
Individual on the job are affected by any change in job environment or job content.
2. Herzberg’s model is ‘method bound’ and a number of other methods used for similar
study have shown different result and not supporting his contentions.
3. This theory does not attach much importance to pay, status or interpersonal relationship
which is generally held as important contents of satisfaction.
PAPER-IV (BPA)
Answer: Privatization: - Privatization refers to the transfer of assets or service function from
public to private ownership or control and the opening of hitherto closed areas to private sector
entry. Privatization can be achieved in many ways-franchising, leasing, contracting and
divesture. Divesture through equity sale is the most significant, since ownership is transferred to
public / corporate entities. The new set of economic refers aimed at giving greater role to the
private sector in the nation building process and a reduced role to the public sector. This was a
reversal of the development strategy pursued so far by Indian planners. To achieve this, the
government redefined the role of the public sector in the New Industrial Policy of 1991, adopted
the policy of planned disinvestments of the public sector and decided to refer the loss making
and sick enterprises to the Board of Industrial and Financial Reconstruction. The term
disinvestments used here means transfer in the public sector enterprises to the private sector. It
results in dilution of stake of the government in the public enterprise. If there is dilution of
government ownership beyond 51 percent, it would result in transfer of ownership and mgt. of
the enterprise to the private sector.
Through this policy of 1991, the govt. of India moved the country to this privatization pattern.
1. Privatization will help reducing the burden on exchequer which results from the public
subsidizing of chronically loss making public sector units.
2. It will help the profit making public sector units to modernize and diversify their
business.
3. It will help in making public sector units more competitive.
4. It will help in improving the quality of decision-making of managers because their
decisions will be made without any political interference.
5. Privatization may help in reviving sick units which have became a liability on the public
sector.
6. Without government financial backing, capital market and international market will force
public sector to be efficient.
1. Privatization will encourage growth of monopoly power in the hands of big business
houses. It will result in greater disparities in income and wealth.
2. Private enterprises may not show any interest in buying shares of loss-making and sick
enterprises.
3. Privatization may result in lop-sided development of industries in the country. Private
entrepreneur will not be interested in long-gestation projects, infrastructure investments
and risky projects. It may retard growth of capital good industries and other industries
where the profit margin is less.
4. Private individuals prefer to invest money in trade, real estate and other services areas
which allows small investments and where capital obtains good returns. But for changing
the very structure of the economy, the investment should go to strategic sectors of
economy.
5. The private sector may not uphold the principles of social justice and public welfare.
They may look for maximizing their short run profits ignoring the needs of the economy.
6. Given its commitments to W.T.O., the government of India cannot avoid foreign
competition nor can it favour particular firms in the private sector. Under such
circumstances, some of our public sector giants are best bets for becoming globally
competitive firms.
7. It is contended that liberalization and de regulation are very important if any firm is to
deliver higher profits. Since public sector enterprises exist in a regulatory framework,
they are not able to deliver higher productivity and profit. Had they been given unbridled
freedom to decide prices, product-mix etc. they would have behaved like private sector
and showed higher efficiency and higher returns. It is not the ownership which is
important but the competitive environment. Thus, the belief that privatization per se leads
to better results itself is questionable.
Privatization offers both opportunities and threats to the economy. We have to
privatize in such a manner that me make the maximum of opportunities while at the same time
minimizing the threats to the economy.
Answer: The government has made a significant impact on the working of enterprises in
business and industry. The Indian corporate sector has come face to face with several challenges
due to government policy changes. These challenges can be explained as follows:-
4) NECESSITY FOR CHANGE: - In a regulated environment of pre 1991 era, the firms could
have relatively stable policies and practices. After 1991, the market forces have become
turbulent as a result of which the enterprise have to continuously modify their operations.
6) MARKET ORIENTATION: - Earlier firms used to produce first and go to the market for
sale later. In other words, they had production oriented marketing operations. In a fast changing
world, there is a shift to market orientation in as much as the firms have to study analyses the
market first and produce goods accordingly.
Government also adopts some regulation or imposes some controlling measures
on business in order to curb the activities which are prejudicial to the interest of the cross
sections of the different policies, laws, acts and rules which may be directly or indirectly.
Examples of direct control include Industrial Policy, Companies Act 1956, M.R.T.P. Act 1969,
F.E.M.A. Act 1999 etc. while monetary policy, fiscal policy etc. are covered under indirect
control. On the whole, the impact of govt. of policy changes particularly in respect of
liberalization, privatization and globalization has been positive as the Indian business and
industry has shown great resilience in dealing with the new economic order. Indian enterprises
have developed strategies and adopted business processes and producers to meet the challenges
of competition. They have become more customers- focused and adopted measures to improve
customer relationship and satisfaction.
PAPER – V (MB)
Q1) What are index numbers? Why are index numbers called economic barometer? Discuss
the limitation of index numbers.
Answer: Index numbers are devices which measure the change in the level of a phenomenon
with respect to time, geographical location or some other characteristic. Of all index numbers,
price index number is the most important one.
According to Spiegel, “An index number is a statistical measure designed to show changes in a
variable or group of variable with respect to time, geographical location or other characteristics”.
Index numbers are considered as the ‘barometers’ of an economic activity. If someone wants to
get an idea as to what is happening to an economy, he should look to important indices like the
index of industrial production, agricultural production, business activity and other related areas.
Index numbers measure the pulse of an economy and act as barometers to find the ups and
downs in the general economic conditions of the country. Index numbers of prices, output,
foreign exchange reserves, bank deposit, etc. throne light on the variation in the level of business
activity of a country and these indices can be combined into a composite index which could act
as an economic barometer.
Of all indices (index numbers), price index number is the most important one. It is a pure
number which expresses by how many percentage points the average price of a group of related
commodities has changed(i.e., increased or decreased) during a period(called the current period)
with respect to the average price of the same set of commodities of another period (called the
base period) which is usually a past period. For convenience, the price of the base period is taken
as 100. If the price index in the current period is 105(say) with respect to the base period then it
reflects that the average price in the current period has gone up by 5 percent with respect to the
average price in the base period, the set of commodities being the same in both the periods.
Limitations of Index Numbers:-Although index numbers are useful for measuring relative
changes yet it is subject to certain limitations, some of which are:
1. Definition of the purpose: -A definition awareness of the purpose for which index
numbers are to be used will have a determining influence on the selection of
commodities, selection of sources of data, selection of base year and the system of
weighting.
2. Selection of commodities: -The commodities selected should be fairly representative of
the phenomenon under investigation. It should remain uniform in quantity from year to
year.
3. Selection of sources of data: -A decision has to be taken about the arrangements to be
made for obtaining the price quotations of the commodities selected from various centers.
Since, it is not necessary to collect the price of a commodity from all the markets in the
country where it is bought and sold; we should select a sample of the markets.
4. Selection of base: - the base period also known as the reference period, is the period
against which comparison are made. It is very essential in constructing index numbers
that a reference is made to some base period. It may be a year, month or a day. The index
number for base period is always taken as 100.
The consideration should be given to the following points for selecting a base period.
a) The base period should be a normal one i.e. it should be free from all
abnormalities like war, booms etc.
b) The base period should not be two distant in the past.
c) The base may be fixed or changing.
5. Choice of an average: -Usually, and geometric mean are used for constructing the index.
But in practice, arithmetic mean is more popularly used as it is simpler to compute than
geometric mean. However, whenever possible, in the interest of greater accuracy,
geometric mean should be preferred.
6. Selection of appropriate weights: -The term ‘weight’ refers to relative importance of
the different items in the construction of the index. The importance of different items is
done by allocating weight.
7. Selection of an appropriate formula: - The selection of an appropriate formula
depends on the purpose of the index and the data available as there are a large number of
formulae for constructing index numbers.
Q2) Write a note on the origin and development of operations research. Discuss the role and
limitations of linear programming.
Answer: Operations Research is a management science started during the Second World War.
The word ‘operation’ indicates some action that we apply to some problems or hypothesis and
the word ‘research’ is an organized process of seeking out some facts about the same.
ORIGIN AND DEVELOPMENT OF OPERATION RESEARCH:- The origin of operations
research can be traced back many decades. During World War II, there was an urgent need to
allocate scare resources to various military operations and to the activities within each operation
in an effective manner. The problems associated with the allied military efforts were so complex
that it was difficult to expect a solution of these problems from any single discipline. Here
scientists from various disciplines were assembled as a unit within British armed forces. Because
of the diverse educational backgrounds and the talent, this armed team of scientist was
remarkably successful in improving the effectiveness of complete military operations.
Consequently, American efforts produced many fundamental advances in mathematical
techniques for analyzing military operations. As the problems assigned to these groups related to
military operations. As the problems assigned to these groups related to military operations, their
work was known as Operational Research in United Kingdom and Operation Research
elsewhere.
After the World War II, scientists from these Operational Research group focused their
attention on applying these techniques to civilian problems. Some of them concentrated their
efforts on providing sound foundations for many of the techniques which were developed during
World War II while other devoted their efforts in developing techniques for solving problems
faced by large industries, business and government.
As a result, many improvements in the state of art took place. A prime example is the
simplex method for solving linear programming problems which was developed by George
Dantzig in 1947. Many of the standard tools of Operations Research, e.g., linear programming,
dynamic programming, queing theory, and inventory theory were relatively well developed
before the end of the 1950’s. The computer revolution during the same period also helped in
rapid spread and sustained success of the Operational Research approach to problem solving.
Computer became an invaluable tool to Operations Research analyst enabling him to perform
otherwise intractable calculations. Indeed, many of the problem solving methods such as
transportation, simulation etc. now regarded as standard would be unthinkably impracticable
without modern computers.
Inspite of having wide applicability of linear programming technique, it has certain limitations
some of which are as follows:
(i) In order to linear programming techniques, the objective function and the constraints
must be expressed linearly. However, in real world business problems, many objective
functions and constraints cannot be expressed linearly.
(ii) In order to apply linear programming, the co-efficients in the objective functional and
the constraint inequations must be completely known and they must not change during
the period of study. However, in practical situation, it may not be possible to state all
co-efficient in the objective function and constraints with certainity.
(iii) To apply linear programming technique there must be only one goal which is expressed
in the objective function, e.g., maximizing the value of the profit function or
minimizing the cost function. Linear programming will fail to give a solution if
management has multiple goals.