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MB0026: ManagerialEconomics[Assignment SET1 & SET2]

Name : P. Srinath

SMDUE ID : 520923307

Center : Mehbub College Campus, SecunderabadSubject Code : MB0026

Subject : Managerial Economics

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ASSIGNMENT MBA SEM I Subject Code:

MB0026 SET 1

1. The demand function of a good is as follows:

Q1=100-6P1-4P2+2P3+0.003Y

WHERE P1 and Q1 are the price and quantity values of good 1

P2 and P3 are the prices of good 2 and good 3 and Y is the

income of

the consumer. The initial values are given:

P1 =7

P2 =15

P3 =4Y=8000

Q1 =30

You are required to:

a) Using the concept of cross elasticity determine the relationship

between good 1 and others

b) Determine the effect on Q1 due to a 10 % increase in the price

of good 2 and good 3

Cross elasticity can be defined as the proportionate change in thequantity demanded of a particular commodity in response to a change in

the price of another related commodity.

a) Cross elasticity between good 1 and product 2 = (dQ1/dP2)*(P2/Q1)

Cross elasticity between good 1 and product 3 = (dQ1/dP3)*(P3/Q1)

Taking the differentiation of the equation:

dQ1/dP2 = -4

dQ1/dP3 = 2

Putting the values in the elasticity equation:

Cross elasticity between good 1 and product 2 = (dQ1/dP2)*(P2/Q1)

= (-4) * (P2/Q1)

= (-4) * (15/30)

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= -2

Cross elasticity between good 1 and product 3 = (dQ1/dP3)*(P3/Q)

= (2) * (P3/Q1)

= (2) * (4/30)

= 0.267

b) As per the cross elasticity equation:

E = % Change in demand of product A / % Change in price of product B

% Change in demand of product A = E * % Change in price of product B

Putting the values from

% Change in demand of product A due to 10 % increase of good 2 = -2 *

10

= -20%% Change in demand of product A due to 10 % increase of good 3 =

0.267 * 10

= 2.67%

2. What are the factors that determine the Demand curve? Explain.

A demand curve is a locus of points showing various alternative prices

quantity combinations. The total quantity demanded at different prices

in a market by the whole body consumers at a particular period of time iscalled market demand schedule. The graphical presentation of the

demand schedule is called as a demand curve.

It represents the functional relationship between quantity demanded

and prices of a given commodity. The demand curve has a negative slope

or it slope downwards to the right. The negative slope of the demand

curve clearly indicates the quantity demanded goes on increasing as price

falls and vice versa.

Law of demand: Other things being equal, a fall in price leads to

expansion in demand and a rise in price leads to contraction in demand.

The factors that determine the Demand curve are as follows:-

Price of the given commodity, prices of other substitutes and

complements, future expected trends in price etc.

General Price level existing in the country -inflation or deflation.

Level of income and living standards of the people.

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Size, rate of growth and composition of population.

Tastes, preferences, customs, habits, fashion and styles.

Publicity, propaganda and advertisements.

Quality of the product.

Profit margin kept by the sellers.

Weather and climatic conditions.

Conditions of trade-boom or prosperity in the economy.

Terms and conditions of trade.

Governments taxation policy, liberal or restrictive measures.

Level of savings and pattern of consumer expenditure.

Total supply of money circulation and liquidity preference of the

people.

Improvements in educational standards.

3. A firm supplied 3000 pens at the rate of Rs 10. Next month, due

to a rise of in the price to 22 rs per pen the supply of the firm

increases to 5000 pens. Find the elasticity of supply of the

pens?

Price elasticity of demand is a ratio of two pure numbers, the

numerator is the percentage change in the quantity demanded and the

denominator is the percentage change in price of the commodity. It is

measured by the following formula:

Ep = Percentage change in quantity demanded/ Percentage changed in

price

Applying the provided data in the equation:

Percentage change in quantity demanded = (5000 3000)/3000

Percentage changed in price = (22 10) / 10

Ep = ((5000 3000)/3000) / ((22 10)/10) = 1.2

4. Briefly explain the profit-maximization model?

Profit- making is one of the traditional, basic and major objectives of a

firm. Profit- motive is the driving force behind all business activities of a

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company. It is the primary measure of success or failure of a firm in the

market.

Profit-maximization implies earning highest possible amount of profits

during the given time. A firm has to generate largest amount of profits by

building optimum productive capacity both in the short run and long run

depending upon various internal and external factors and forces. There

should be proper balance between short run and long run objectives. In

the short run a firm is able to make only slight or minor adjustments in

the production process as well as in business conditions. The plant

capacity in the short run is fixed and as such, it can increase its

production and sales by intensive utilization of existing plants and

machineries, having over time work for existing staff etc. Thus, in the

short run, a firm has its own technical and managerial constraints. But in

the long run, as there is plenty of time at the disposal of a firm, it canexpand and add to the existing capacities build up new plants; employ

additional workers etc to meet the rising demand in the market. Thus, in

the long run, a firm will have adequate time and ample opportunity to

make all kinds of adjustments and readjustments in production process

and in its marketing strategies.

There are various factors that contribute to the maximization

of profits of a firm. Some of them are listed below:-

Pricing and business strategies of rival firms and its impact on the

working of the given firm.

Aggressive sales promotion policies adopted by rival firms in the

market.

Without inducing the workers to demand higher wages and salaries

leading to rise in operation costs.

Without resorting to monopolistic and exploitative practices inviting

government controls and takeovers.

Maintaining the quality of the product and services to the

customers.

Taking various kinds of risks and uncertainties in the changing

business environment.

Adopting a stable business policy.

Avoiding any sort of clash between short run and long run profits in

the business policy and maintaining proper balance between them.

Maintaining its reputation, name, fame and image in the market.

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Profit maximization is necessary in both perfect and imperfect

markets. In a perfect market, a firm is a price-taker and under

imperfect market it becomes a price-searcher.

Assumptions of the model:-

The profit maximization model is based on three important

assumptions. They are as follows:-

Profit maximization is the main goal of the firm.

Rational behavior on the part of the firm to achieve its goal of profit

maximization.

The firm is managed by owner-entrepreneur

5. What is Cyert and Marchs behavior theory? What are the

demerits?

Cyert and Marchs behavior makes an attempt to explain the behaviorof inter group conflicts and their multiple objectives in an organization.

Basically, this theory explains the usual and normal behavior of different

groups of people who work in an organization having mutually opposite

goals.

Cyert and March explain how complicated decisions are taken in big

industrial houses under various kinds of risks and uncertainties in an

imperfect market in the background of limited data and information. The

organizational structure, goals of different departments, behavioral

pattern and internal working of a big and multi-product firm differs fromthat of small organizations. The various kinds of internal conflicts and

problems faced by these organizations. They also explain how there are

certain common problems faced by similar organizations in an industry

and their effects on internal working of each individual organization and

their decision making process.

Cyert and March consider that a modern firm is a multi-product, multi-

goal and multi-

decision making coalition business unit. Like a coalition government, it is

managed by a number of groups. The group consists of share holders,

managers, workers, customers, suppliers, distributors, financiers, legal

experts and so on. Each group is independent by itself and has its own set

of objectives and they try to maximize their individual benefits.

Cyert and March points out the goals of a business organization would

depend upon the multiple objectives of each group and their collective

demands. Demands of each group would depend on their aspirations

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levels, expectations, actual performance of the organization, bargaining

power of each group, past success in their demands, etc.

As all of them change over a period of time, the demands of each

group would all of them change over a period of time, the demands of

each group would also undergo changes. If actual performance and

achievements of the organization is much better than expected

aspirations and target level, in that case, there will upward revision in

their demands and vice-versa.

Thus, there is a strong linkage between the expected and actual

demand of each group in the organization, past success and future

environment. Each group makes an attempt to achieve its demand in its

own way.

Cyert and March are of the opinion that out of several

objectives a firm has five important goals. They are:-

Production goal: Production is to be organized on the basis of

demand in the market. Neither there should be over production nor under

production but just that much to meet the required demand in the

market, avoid excess capacity, over utilization of capital assets, lay-off of

workers etc.

Inventory goal: Inventory refers to stock of various inputs. In order to

ensure continuity in production and supply, certain minimum level of

inventory has to be maintained by a firm. Neither there should be surplus

stock or shortage of different inputs. Proper balance between demand and

supply should be maintained.

Sales goal: There should be adequate sales in any organization to

earn reasonable amounts of profits. In order to create demand, sales

promotion policies may be adopted from time to time.

Market-share goal: Each firm has to make consistent effort to

increase its market share to compete successfully with other firms and

make sufficient profits.

Profit goal: This is one of the basic objectives of any firm. The very

survival and success of the firm would depend upon the volume of profitsearned by it.

The above mentioned objectives also would undergo changes over a

period of time in the background of modern business environment. Hence,

decision making would become complex and complicated.

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The demerits are as follows:-

The theory fails to analyze the behavior of the firm but it simply

predicts the future expected behavior of different groups.

It does not explain equilibrium of the industry as a whole.

It fails to analyze the impact of the potential entry of the new firms

into the industry and the behavior of the well established firms in

the market.

It highlights only on short run goals rather than long run objectives

of an organization. Thus, there are certain limitations to this theory.

6. What is Boumals Static and Dynamic?

The model highlights that the primary objective of a firm is to

maximize its sales rather than profit maximization. It states that the goalof the firm is maximization of sales revenue subject to a minimum profit

constraint. The minimum profit constraint is determined by the

expectations of the share holders. This is because no company can

displease the share holders. Maximization of sales does not mean

maximization of physical sales but maximization of total sales revenue.

Hence, the managers are more interested in increasing the sales rather

than profit. The basic philosophy is that when sales are maximized

automatically profits of the company would also go up.

Prof. Boumal has developed two models. The first is static model and

the second one is the dynamic model.

The Static model:-

The model is based on the following assumptions.

The model is applicable to a particular time period and the model

does not operate at different periods of time.

The firm aims at maximizing its sales revenue subject to a minimum

profit constraint.

The demand curve of the firm slope downwards from left to right. The average cost curve of the firm is U-shaped one.

Sales Maximization (dynamic model):-

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Many changes take place which affects business decisions of a firm. In

order to include such changes, Boumal developed dynamic model. This

model explains how changes in advertisement expenditure, a major

determinant of demand, would affect the sales revenue of a firm under

severe competitions.

This model is based on certain assumptions. They are as

follows:-

Higher advertisement expenditure would certainly increase sales

revenue of a firm.

Market price remains constant.

Demand and cost curves of the firm are conventional in nature.

Under competitive conditions, a firm in order to increase its volume of

sales and sales revenue would go for aggressive advertisements. Thisleads to a shift in the demand curve to the right. Forward shift in demand

curve implies increased advertisement expenditure resulting in higher

sales and sales revenue. A price cut may increase sales in general. But

increase in sales mainly depends on whether the demand for a product is

elastic or inelastic. A price reduction policy may increase its sales only

when the demand is elastic and if the demand is inelastic; such a policy

would have adverse effects on sales.

Hence, to promote sales, advertisements become an effective instrument

today. It is the experience of most of the firms that with an increase inadvertisement expenditure, sales of the company would also go up. A

sales maximizer would generally incur higher amounts of advertisement

expenditure than a profit maximizer. However, it is to be remembered

that amount allotted for sales promotion should bring more than

proportionate increase in sales and total profits of a firm. Otherwise, it will

have a negative effect on business decisions.

By introducing, a non-price variable into this model, Boumal makes a

successful attempt to analyze the behavior of a competitive firm under

oligopoly market conditions. Under oligopoly conditions as there are onlya few big firms competing with each other either producing similar or

differentiated products, would resort to heavy advertisements as an

effective means to increase their sales and sales revenue.

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ASSIGNMENT MBA SEM I Subject Code:

MB0026 SET 2

7. What is pricing policy? What are the internal and external factors of the

policy?

Pricing PoliciesPricing Policies refer to the policy of setting the price of the product

or product & services by the management after taking into account of

various internal and external factors, forces and its own business

objectives. The decision of pricing is very important in any business. Price

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once fixed is never permanent. It needs to be reviewed and revised

according to the market conditions.

Internal factors which can affect the pricing decisions of the company

include suppliers, employees efficiency, profit margin, production cost

and other expenses, brand image and expectations of the company.

Suppliers provide the raw materials to the company and good relations

with suppliers can make the company to buy quality products at

reasonable prices. Employees' efficiency can also reduce the costs of the

company and company can charge lower prices. Product cost also

determines the prices of the products because all of the companies have

to cover up the product costs. Moreover, image of the company also plays

an important role in the price decisions of the company because a global

brand will usually charge premium prices.

On the other hand, the external factors include government policies,

competitors' prices, costs of raw materials, consumers expectations anddemand and supply of the product. Government sets the price floors to

save the interest of the borrowers and the sellers, therefore, government

policies should be also take into consideration. Expectations of the

consumers or consumer reservation prices are also considered in the

price decisions. Costs of raw materials in the market also determine the

pricing strategies. Moreover, the prices offered by the competitors can

also impact the pricing decisions of the company.

8. Mention three crucial objectives of price policies.

Price policy has certain objectives:-

To maximize profits : - Every firm tries to maximize their profits. So

they should have a price policy, which fetches them maximum

revenue. Every firm should have a price policy keeping the long run

prospects in mind.

Price Stability : - Always fluctuating price is not for the goodwill of thecompany. A stable price always wins the confidence of customers.

Ability to pay : - The price should be fixed according to the ability of

consumer to pay; high price for rich customers and low for poor

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customers. This can be applied in case of services given by doctors,

lawyers etc.

9. Mention the bases of price discrimination.

PRICE DISCRIMINATIONThe monopoly seller has the advantage of price discrimination, as he

is the only producer in the market. Price discrimination is charging

different price to different buyer for the same product.

DEGREES OF PRICE DISCRIMINATION

1. First degree price discrimination It is also called perfect price

discrimination, as it involves maximum exploitation of the consumer in

the interest of the seller. It happens when the seller is able to sell each

unit separately and at a different price. Each buyer is made to pay the

amount he is willing to pay rather going without it. The seller will make

different bargain with each buyer. Such type of price discrimination

enjoyed by the seller is called first degree price discrimination.

2. Second degree price discrimination It happens when the

monopoly seller will charge separate price in such a way that the buyer is

divided into different groups according to the price elasticity of demand

for his product.

3. Third degree price discrimination When the seller will be

divided into sub-market and charge different price depending on the

output sold in the market and the demand condition of that sub-market.

The seller practising price discrimination between the domestic marketand international market, the seller will charge higher price in the

domestic market, where he enjoys monopoly and charge low price in the

international market, where he has to face more competition.

10.What do you mean by the fiscal policy? What are the instruments

of fiscal policy? Briefly comment on Indias fiscal policy.

Fiscal policy is a policy, which affects aggregate output, employment,

saving, investment etc. A responsible government would contain its

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expenditure within its revenue and thus making the budget balanced. The

instruments of Fiscal Policy are Automatic Stabilizer and Discretionary

Fiscal Policy:

i) Automatic Stabilizer: The tax structure and expenditure are

programmed in such a way that there is increase in expenditure and

decrease in tax in recession and decrease in expenditure and increase in

tax revenue in the period of inflation. It refers to built-in response to the

economic condition without any deliberate action on the part of

government. It is called built- in- stabilizer to correct and thus restore

economic stability. It works in the following manner,

Tax revenue: Tax revenue increases when the income increases; as

those who were not paying tax go into the higher income tax bracket.

When there is depression, the income decreases and many people fall in

the no-income-tax bracket and the tax revenue decreases.

ii) Discretionary Fiscal Policy: Under this, to stabilize the economy,deliberate attempts are made by the government in taxation and

expenditure. It entails definite and conscious actions.

Instruments of Fiscal Policy: Some important instruments of fiscal

policy are:-

1. TAXATION: Taxation is always a very important source of revenue

for both developed and developing countries. Tax comes under two

heading Tax on individual (direct tax) and tax on commodity (indirect tax

or commodity tax).Direct tax includes income tax, corporate tax, taxes on

property and wealth. Indirect tax is tax on the consumptions. It includes

sales tax, excise duty and custom duties. Direct tax structure can be

divided into three bases-

1. Progressive tax

2. Regressive tax

3. Proportional tax

Progressive tax: Progressive tax says that higher the level of income,

greater the volume of tax burden you have to bear. This means as income

increases, the tax contribution should also increase. Low income group

people pay low tax, whereas the high income group people pay higher

tax.Regressive tax: It is theoretically possible, though no government

implements such tax structure, because that leads to unequal distribution

of income. As your income increases, the contribution through tax

decreases. Low income people will pay more and high income people will

pay less.

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Proportional tax: When the tax imposed is irrespective of the income

you earn, every income group, high or low pay the same amount of tax.

2. INDIRECT TAX OR CONSUMPTION TAX: Indirect tax differs from

direct tax. Tax which is imposed on every unit of product is known as

lump sum tax. E.g. excise tax and sales tax. Taxes depending on the

value of particular product are called ad valorem tax e.g. tax on airline

tickets.

A good tax structure has to control and bring stability in economic

system. There are few requirement of a good tax structure. They are

The revenue earned through tax structure should be adequate.

The distribution of tax burden should be equal.

Administration cost should not be more than revenue earned.

Tax burden should be borne by the person who is taxed.

11.Comment on the consequences of environmental degradation on

the economy of a community.

Environmental Degradation

For sustainable economic growth, the environment should be properly

preserved and improved. The stocks may remain constant or it can even

rise but the environment resources are the base of the country and the

quality of air, water and land represents the heritage of a nation. The

environment damages in the developing countries are the main concern

nowadays. Environmental damages can be in these categories-

Water pollution

The water quality is continuously deteriorating due to contamination

from the industrial waste, by throwing out chemical waste and heavy

metal in the river. It is difficult to remove the pollutants form the water to

make it good for drinking purpose. The capacity of the water to preserve

the aquatic life is becoming more and more difficult. The under ground

water is also getting affected by the industrial waste, as they some times

get discharged directly into underground water.

Air pollution

Air pollution can be contributed to the three man made sources,

industrial production, vehicles and the energy. Human suffering increases

due to the air pollution. Respiratory disorders and cancers are due to

inhalation of polluted air. The vehicle increases the sulpur dioxide

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concentration in the air creating breathing problems for the children and

affects their neurological developments.

Deforestation

Forest is the most important source to protect environment. They

protect soil erosion and regulate the ecological balance of the nature.

They i affect the nature and the climatic condition of the region. The blind

increase in the industrial growth is leading to cutting down of many forest

leading to many serious problems for the human being.

12. Write short notes on the following:

a) Philips curve

b) Stagflation

a) Philips curve

Philips Curve describes the relationship between inflation and

unemployment in an economy.

New Zealand-born economist A.W Philips first put this theory forward

in 1958 gathered the data of unemployment and changes in wage levels

in the UK from 1861 to 1957. He observed that one stable curve

represents the trade-off between inflation and unemployment and they

are inversely/negatively related. In other words, if unemployment

decreases, inflation will increase, and vice versa.

For example, after the economy has just been in recession, the

unemployment level will be fairly high. This will mean that there is a labor

surplus.

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As the economy has just started growing, the aggregate demand (AD)

will increase and therefore leading to an increase in employment. In the

beginning, there will be little pressure for a raise in wages. However, as

the economy grows faster and more people are employed, wages willstart rising slowly.

b) Stagflation

Stagnation + Inflation = Stagflation

Stagnation = Slow or no growth. Inflation = Rises in price.

Stagflation is an economic trend in which inflation and unemployment

rise while general growth of the economy is slow. It can be difficult to

correct stagflation, because focusing on one aspect of the problem canexacerbate other aspects. Many governments try to avoid stagflation

through fiscal policy, by promoting even and healthy growth and

attempting to prevent inflation. If stagflation continues long enough, it will

trigger an economic recession and an ultimate self-correction.

Stagflation is when the economy experiences slow GDP growth

(stagnation) with high inflation and high level of unemployment. This

occurred in the 1970's in many countries. When the economy is working

normally, slow economic growth reduces demand, which keeps prices low,

preventing inflation. Stagflation can only occur when fiscal or monetarypolicy sustains high prices, and inflation, despite slow growth.

Stabilization policies to control stagflation.

The money supply should be tightened to check inflation.

We can control inflationary wage and price increases with direct

controls. Government can limit increases by law or constrain them

through tax policies.

Protect people against the effects of inflation. All wages, including the

minimum wage, could be increased automatically when the Consumer

Price Index increases. Government bonds could pay a fixed real interest

rate by adjusting the actual interest rate for inflation.

Stagflation is difficult to control without government controls. Therefore,

political will is necessary for formulating the measures to stop stagflation.

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