UBA34-MANAGERIAL ECONOMICS UNIT-1 Question & Answers 100%Theory

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1 UBA34-MANAGERIAL ECONOMICS UNIT-1 Question & Answers 100%Theory Syllabus: [Regulation: 2012] UNIT I Introduction: Nature and scope of magerial economics-basic economic problem-macro and micro economic-objectives of the firm. PART QUESTIONS 1. Define Managerial Economics. (Nov/Dec 2011) Managerial economics deals with integration of economic theory with business practice for the purpose of facilitating decision making and forward planning by management. 2. What is a Firm? The firm defined as an independently administrated business unit. 3. Define the term Economics. (Nov/Dec 2013) The branch of knowledge concerned with the production, consumption, and transfer of wealth. 4. What are the areas covered by macro-economic?(nov 2014) The macroeconomic covered area such as unemployment, national income, rate of growth, gross domestic product, inflation and price level. 5. Define Macro Economics. The field of economics that studies the behavior of the aggregate economy. Macroeconomics examines economy-wide phenomena such as changes in unemployment, national income, rate of growth, gross domestic product, inflation and price level. 6. Define an optimum firm.( Nov 2012) Optimum firm refers to the size of a business more specifically the amount of growth for a small business. 7. What you mean by Micro economics? (April 2011) RAAK/BBA/DHARANI KUMARI.H/II YEAR/III Sem/UBA34/UNIT-1/Ans/VER 2.0 Unit 1 Answer Page 1 of 14

2 The branch of economics that analyzes the market behavior of individual consumers and firms in an attempt to understand the decision-making process of firms and households. 8. What are the objectives of business firms? ( Nov 2010) The basic objectives of the business firms are Profit satisfaction, sales maximization, Growth maximization, social environmental concerns, cooperation. 9. Point out important concepts of Economics. a) Choice b) Opportunity cost c) Interest rate d) Demand e) Supply and Market f) Competition and Price 10. List out the objectives of the firm. Profitability Productivity Customer service Employee retention Marketing Gain the good will from the customers. PART B QUESTIONS 1. What are the reasons for economic problem? (Nov/Dec 2011) RAAK/BBA/DHARANI KUMARI.H/II YEAR/III Sem/UBA34/UNIT-1/Ans/VER 2.0 Unit 1 Answer Page 2 of 14

3 1. What goods are produced and in what quantities by the productive resources which the economy possesses? 2. How are the different goods produced? That is, what production methods are employed for the production of various goods and services? 3. How is the total output of goods and services of a society distributed among its people? 4. Are the use of productive resources economically efficient? 5. Whether all available productive resources of a society are being fully utilized, or are some of them lying unemployed and unutilized? 6. Is the economy s productive capacity increasing, declining or remaining static over time? 2. What are the relationship between micro economics and macroeconomics? Microeconomics Macroeconomics 1. It is the study of individualit is the study of economy as a economic units of an economy whole and its aggregates. 2. It deals with individual income, It deals with aggregates like individual prices and individualnational income, general price output, etc. level and national output, etc. 3. Its Central problem is priceits central problem is determination and allocation ofdetermination of level of income resources. and employment. 4. Its main tools are demand andits main tools are aggregate supply of a particulardemand and aggregate supply of commodity/factor. economy as a whole. 5. It helps to solve the centralit helps to solve the central problem of what, how and forproblem of full employment of whom to produce in the economy resources in the economy. It is concerned with the 6. It discusses how equilibrium of determination of equilibrium level a consumer, a producer or an of income and employment of the industry is attained. economy. RAAK/BBA/DHARANI KUMARI.H/II YEAR/III Sem/UBA34/UNIT-1/Ans/VER 2.0 Unit 1 Answer Page 3 of 14

4 Microeconomics Macroeconomics 7. Price is the main determinant ofincome is the major determinant of microeconomic problems. macroeconomic problems. 8. Examples are: individualexamples are: National income, income, individual savings, pricenational savings, general price determination of a commodity, level, aggregate demand, aggregate individual firm's output, supply, poverty, unemployment consumer's equilibrium. etc. 3. How does managerial economics differ from the traditional economics? (Nov 2012) Managerial Economics has been described as economics applied to decisionmaking. It may be viewed as a special branch of Economics. However, the main points of differences are the following: 1. The traditional Economics has both micro and macro aspects whereas Managerial Economics is essentially micro in character. 2. Economics is both positive and normative science but the Managerial Economics is essentially normative in nature. 3. Economics deals mainly with the theoretical aspect only whereas Managerial Economics deals with the practical aspect. 4. Managerial Economics studies the activities of an individual firm or unit. Its analysis of problems is micro in nature, whereas Economics analyzes problems both from micro and macro point of views. 5. Economics studies human behavior on the basis of certain assumptions but these assumptions sometimes do not hold good in Managerial Economics as it concerns mainly with practical problems. 6. Under Economics we study only the economic aspect of the problems but under Managerial Economics we have to study both the economic and noneconomic aspects of the problems. 7. Economics studies principles underlying rent, wages, interest and profits but in Managerial Economics we study mainly the principles of profit only. RAAK/BBA/DHARANI KUMARI.H/II YEAR/III Sem/UBA34/UNIT-1/Ans/VER 2.0 Unit 1 Answer Page 4 of 14

5 8. Sound decision-making in Managerial Economics is considered to be the most important task for the improvement of efficiency of the business firm; but in Economics it is not so. 9. The scope of Managerial Economics is limited and not as wide as that of Economics. 4. Explain the objectives of business firms. (April 2011) Profitability Maintaining profitability means making sure that revenue stays ahead of the costs of doing business, according to James Stephenson, writing for the "Entrepreneur" website. Focus on controlling costs in both production and operations while maintaining the profit margin on products sold. Productivity Employee training, equipment maintenance and new equipment purchases all go into company productivity. Your objective should be to provide all of the resources your employees need to remain as productive as possible. Customer Service Good customer service helps you retain clients and generate repeat revenue. Keeping your customers happy should be a primary objective of your organization. Employee Retention Employee turnover costs you money in lost productivity and the costs associated with recruiting, which include employment advertising and paying placement agencies. Maintaining a productive and positive employee environment improves retention, according to the Dun and Bradstreet website. Core Values Your company mission statement is a description of the core values of your company, according to the Dun and Bradstreet website. It is a summary of the beliefs your company holds in regard to customer interaction, responsibility to the community and employee satisfaction. Growth Growth is planned based on historical data and future projections. Growth requires the careful use of company resources such as finances and personnel RAAK/BBA/DHARANI KUMARI.H/II YEAR/III Sem/UBA34/UNIT-1/Ans/VER 2.0 Unit 1 Answer Page 5 of 14

6 Maintain Financing Even a company with good cash flow needs financing contacts in the event that capital is needed to expand the organization. Change Management Change management is the process of preparing your organization for growth and creating processes that effectively deal with a developing marketplace. Marketing Marketing is more than creating advertising and getting customer input on product changes. It is understanding consumer buying trends, being able to anticipate product distribution needs and developing business partnerships that help your organization to improve market share. Competitive Analysis A comprehensive analysis of the activities of the competition should be an ongoing business objective for your organization. Understanding where your products rank in the marketplace helps you to better determine how to improve your standing among consumers and improve your revenue. 5. Discuss the role of managerial economics in decision making process. (Nov2014) Making decision and process information are the two primary tasks of managers. I. INTERNAL FACTORS In order to make intelligent decisions, managers must be able to obtain process and use information. The purpose of learning economic theory is to help managers know what information should be obtained and how to process and use the information. General task of managers to use readily available information to make a decision or carryout a course of action that furthers the goals of the organization. Production scheduling Demand forecasting Market research Economic analysis of industry Investment appraisal RAAK/BBA/DHARANI KUMARI.H/II YEAR/III Sem/UBA34/UNIT-1/Ans/VER 2.0 Unit 1 Answer Page 6 of 14

7 Security management analysis Advance on trade Pricing and the related decision and analyzing and forecasting environmental factors. II.EXTERNAL FACTORS Managerial economics help in deciding about the production, sales and inventory schedules of the firm. Managerial economics not only provides information regarding their prevent level but also forecasts their future trend. A managerial economics is used best to provide the pricing and profit polices. The firm also needs the help of managerial economics for its investment decisions. For this managerial economics need to forecasting the return on the investment and the cost that the firm incurs by taking up the investment. PART C QUESTIONS 1. Describe the basic economic tools in managerial economics. (Nov/Dec 2013) There are six basic tools of managerial economics. They are: Content: 1. The Incremental Concept 2. The Concept of Time Perspective 3. The Opportunity Cost Concept 4. The Discounting Concept 5. The Equi-marginal Concept 6. Risk and Uncertainty RAAK/BBA/DHARANI KUMARI.H/II YEAR/III Sem/UBA34/UNIT-1/Ans/VER 2.0 Unit 1 Answer Page 7 of 14

8 1. The Incremental Concept: A decision is clearly a profitable one if (i) It increases revenue more than costs. (ii) It decreases some cost to a greater extent than it increases others. (iii) It increases some revenues more than it decreases others. (iv) It reduces costs more than revenues. 2. Concept of Time Perspective: (i) It may not be able to take up business with higher contributions in the long run. (ii) The other customers may also demand a similar low price. (iii) The image of the firm may be spoilt in the business community. (iv)the long run effects of pricing below full cost may be more than offset any short run gain. (vi)the management realized that the long run repercussions of pricing below full cost would more than offset any short run gain. (vii) Reduction in rates for some customers will bring undesirable effect on customer goodwill. Therefore, the managerial economist should take into account both the short run and long run effects as revenues and costs, giving appropriate weight to most relevant time periods. 3. The Opportunity Cost Concept The concept of opportunity cost implies three things: 1. The calculation of opportunity cost involves the measurement of sacrifices. 2. Sacrifices may be monetary or real. 3. The opportunity cost is termed as the cost of sacrificed alternatives. RAAK/BBA/DHARANI KUMARI.H/II YEAR/III Sem/UBA34/UNIT-1/Ans/VER 2.0 Unit 1 Answer Page 8 of 14

9 4. It helps in determining relative prices of different goods. 5. It helps in determining normal remuneration to a factor of production. 6. It helps in proper allocation of factor resources. 4. The Discounting Concept One of the widest known principles of economics is the equi-marginal principle. The principle states that an input should be allocated so that value added by the last unit is the same in all cases. This generalization is popularly called the equi-marginal. Let us assume a case in which the firm has 100 unit of labour at its disposal. And the firm is involved in five activities viz., А, В, C, D and E. The firm can increase any one of these activities by employing more labour but only at the cost i.e., sacrifice of other activities. An optimum allocation cannot be achieved if the value of the marginal product is greater in one activity than in another. It would be, therefore, profitable to shift labour from low marginal value activity to high marginal value activity, thus increasing the total value of all products taken together. 5. The Equi-marginal Concept This concept is an extension of the concept of time perspective. Since future is unknown and incalculable, there is lot of risk and uncertainty in future. Everyone knows that a rupee today is worth more than a rupee will be two years from now. This appears similar to the saying that a bird in hand is more worth than two in the bush. This judgment is made not on account of the uncertainty surrounding the future or the risk of inflation. 6. Risk and Uncertainty Managerial decisions are actions of today which bear fruits in future which is unforeseen. Future is uncertain and involves risk. The uncertainty is due to unpredictable changes in the business cycle, structure of the economy and government policies. RAAK/BBA/DHARANI KUMARI.H/II YEAR/III Sem/UBA34/UNIT-1/Ans/VER 2.0 Unit 1 Answer Page 9 of 14

10 This means that the management must assume the risk of making decisions for their institution in uncertain and unknown economic conditions in the future. Firms may be uncertain about production, market prices, strategies of rivals, etc. 2. Indicate the importance of managerial economics. (Nov/Dec 2011) Economics contributes a great deal towards the performance of managerial duties and responsibilities. The manger with working knowledge of economics can performance their function more efficiently than those without it. The basic function of the manager of a business is to achieve the objective of the firm to the maximum possible extent with limited resources placed at their disposal. The emphasis here is on the maximization of the objectives and limitedness of the resources. It is the unlimited resources such as sun shine, air there is no shortages of resources but the business organization should have limited resources such as men, materials, money, so that use the resources as limited and maximize the profit at best level. The study of the economics is the logic, tools and techniques of making optimum use of the available resources to achieve the given goals. Economic provides analytical tools and techniques that managers need to achieve the goals of the organization by the manager. Therefore, a working knowledge of economics not necessarily a formal degree is essential for the manager. RAAK/BBA/DHARANI KUMARI.H/II YEAR/III Sem/UBA34/UNIT-1/Ans/VER 2.0 Unit 1 Answer Page 10 of 14

11 3. Explain the nature and scope of managerial economic. (April 2011) I. Managerial Economics is it positive or normative? Economics is divided into two categories (i) positive economics and (ii) Normative Economics, analysis the strength of business organization. II. Area of study Demand analysis and Forecasting Accurate estimation of demand by analysis the forces acting on demand of the product produced by the firm forms the vital issue in taking effective decision at the firm level. Cost and production analysis In decision making, cost estimates are essential. Production planning, profit planning ect. Pricing decisions, policies and practices Pricing forms the core of managerial economics. The success of failure of a firm mainly depends on accurate price decisions to effectively compete in the market. Profit management All business enterprises are profit-making institutions. The success or failure of a firm is measured only in terms of profit it has made and the percentage of dividend it has declared. Capital Management Capital management is the most troublesome and also ticklish problem from the management of a business involving high-level decisions. Capital management deals with planning and control of capital expenditure, cost of capital, rate of return and selection of project, ect. Linear programming and theory of Games RAAK/BBA/DHARANI KUMARI.H/II YEAR/III Sem/UBA34/UNIT-1/Ans/VER 2.0 Unit 1 Answer Page 11 of 14

12 Linear programming and theory of games have come to be regarded as part of managerial economics recently, as there is a trend towards integration of managerial economics and operations research. III. Profits: the central concepts in managerial Economics Profits are the primary measures of the success of any business. It is the acid test of the economic strength of the firm. Economic theory makes a fundamental assumption that maximizing profit is the basic aim of every firm. Profit maximization continuous to be the objective of the firm and the study of firm in managerial economics has centered round the concepts of profit. IV. Optimization This aims at optimizing a given objective. The aim of linear programming is to aid the process of optimization and choice. Optimization is basic to managerial economics in decision-making. V. Relationship of managerial economics with other Disciplines. Managerial economics is closely related to other subjects like microeconomic theory, macroeconomic theory, mathematics, statistics, accounting, and decision-making and operation research. 4. What are the fundamental concepts associated with managerial economics? Explain. Scientific Concept Economic as a branch of knowledge is concerned with the study of allocation of scarce resources among competing firm. Problem of resources allocation are faced by individuals, enterprise, and nations over the year. The scientific concepts of economics as the science of wealth. Adam smith, who is commonly known as the Father of modern economics, defined as economics as an enquiry in to the nature and causes of the wealth of nations. RAAK/BBA/DHARANI KUMARI.H/II YEAR/III Sem/UBA34/UNIT-1/Ans/VER 2.0 Unit 1 Answer Page 12 of 14

13 According to the Marshall, economics as a study of man s action in the ordinary business of life, it enquires how he gets his income and how he use it. According to the Robbins economics defined as economics is the science which studies human behavior as a relationship between end and scarce means which have alternative uses. Modern Concept According to the Lord J.M.Keynes, economics studies how the level of income and employment in a community are determined. Economics studies administration scares resources and other determinates of income and employment. Economics is a study of the factors affecting the size, distribution and stability of a country s national income. Currently, the theory of economic growth has occupied and important place in the study of economic with reference to under-developed economics. Finally it gives ideas to how the national income grows over the years. 5. Profit maximization is not the only goals of business firms - comment. (April 2011) When a firm applies profit maximization, it is basically saying that its primary focus is on profits, and it will use its resources solely to get the biggest profits possible, regardless of the consequences or the risk involved. Profit maximization is a generally short-term concept. Risk Pursuing a profit maximization strategy comes with the obvious risk that the company may be so entrenched in the singular strategy meant to maximize its profits that it loses everything if the market takes a sudden turn. Expectation and Goodwill You also need to consider consequences of profit maximization. If a company pursues a profit maximization strategy, it creates an environment where price is a premium and cutting costs is a primary goal. This, in turn, creates a perception of the company that could lead to a loss of goodwill with customers and suppliers. RAAK/BBA/DHARANI KUMARI.H/II YEAR/III Sem/UBA34/UNIT-1/Ans/VER 2.0 Unit 1 Answer Page 13 of 14

14 Cash Flow For all its drawbacks, profit maximization carries the big advantage of creating cash flow. When maximizing profit is the primary consideration, investments, reinvestments and expansions are typically tabled. The company simply makes do on what it has.. Financing and Investors Some degree of profit maximization is always present. The goal of a company is to create profits. It has to profit from its business to stay in business. Moreover, investors and financiers in the company may require a certain level of profits to secure funds for expansion. RAAK/BBA/DHARANI KUMARI.H/II YEAR/III Sem/UBA34/UNIT-1/Ans/VER 2.0 Unit 1 Answer Page 14 of 14

15 UBA34-MANAGERIAL ECONOMICS Question & Answers 100%Theory Syllabus: [Regulation: 2012] UNIT II Theory of Consumer Behaviour-Managerial utility- Analysis Indifference curve-law of Demand- Types of Demand- Demand forecasting. PART A QUESTIONS 1. What is Elasticity of demand? ( Nov 2012) The elasticity of demand in a market is great or small according to the amount demanded increases much or little for a given fall in price and diminishes much or little for a given rise in price. 2. What are the characteristics of indifference curve? ( Nov 2013) Consumer always prefers a large quantity of product to a smaller amount of that product, provided the amount of other products does no change. The consumer is consistent in his choice. If he prefers combination A to B and B to C, then he must prefer A to C. The marginal rate of substitution between two goods is diminishing. 3. What are the types of demand? ( Nov 2012) Individual and market Demand Demand for Firm s product and industry s products Autonomous and Derived Demand Demand for Durable and Non-Durable Goods Short-term and Long-term Demand 4. Name the theories of consumer behavior. ( Nov 2014) Utility Theory Indifference preference Theory RAAK/BBA/DHARANIKUMARI.H/II YEAR/III Sem/UBA34/UNIT-2 Answer/ VER 2.0 Unit 2 Answer Page 1 of 22

16 5. Mention any four determinants of demand. ( April 2011) Consumer preference Number of buyers Price and related goods Expectations of the future 6. What is demand forecasting? ( April 2012) A forecasting is an estimate of a future situation. Forecasting demand denotes an estimation of the level of demand of the product at a future period under given circumstances. 7. Define indifference curve. ( April 2012) An indifference curve is a graph showing combination of two goods that give the consumer equal satisfaction and utility. Each point on an indifference curve indicates that a consumer is indifferent between the two and all points give him the same utility. 8. What is mean by utility analysis? ( Nov 2013) A subset of consumer demand theory that analysis consumer behavior and market demand using total utility and marginal utility. The key principle of utility analysis is the law of diminishing marginal utility, which offers an explanation for the law of demand and the negative slope of the demand curve. 9. What is the law of diminishing marginal utility? ( Nov 2013) According to the Alfred Marshall defined as The additional benefit which a person derives from a given increase of his stock of a thing diminishes with every increase in the stock of a thing that he already has. 10.Define the term Demand. ( April 2014) By demand, we mean the various quantities of a given commodity or services with consumers would buy in one market in a given period of time, at various prices, or at various incomes, or at various prices of related goods. RAAK/BBA/DHARANIKUMARI.H/II YEAR/III Sem/UBA34/UNIT-2 Answer/ VER 2.0 Unit 2 Answer Page 2 of 22

17 PART B QUESTIONS 1. Explain the purposes of long term demand forecasting. ( Nov 2010) It involves the assessment of long term demand for the product and involves expansion of production units. A multiple product firm must ascertain not only the total demand situation, but also the demand for different items. Long term forecasting involves the study of technological developments, economic trends and consumer preferences and man-power planning, long term forecasting enables to take major strategic business decisions. When forecasting covering long periods are made, the probability of error may high. Hence, Quality and competent forecasting are essential requirements for this type. 2. Discuss the need for demand forecasting. ( April 2013) For evolving appropriate production policy to avoid problem of over production under production. Proper management of inventories example, purchasing raw materials at appropriate time when their prices are low and avoiding over stocking. To setup reasonable sale target. Planning for a new project, expansion and modernization of an existing unit and technology up gradation. Arranging suitable manpower in long run, technique of production may change. Trained and a killed labour and business executives may be needed for the new type of job responsibility. 3. Explain the concept of indifference curve. ( April 2014) Meaning of Indifference Curve: When a consumer consumes various goods and services, then there are some combinations, which give him exactly the same total satisfaction. The graphical representation of such combinations is termed as indifference curve. Indifference curve refers to the graphical representation of various alternative combinations of bundles of two goods among which the consumer is indifferent. Alternately, indifference curve is a locus of points RAAK/BBA/DHARANIKUMARI.H/II YEAR/III Sem/UBA34/UNIT-2 Answer/ VER 2.0 Unit 2 Answer Page 3 of 22

18 that show such combinations of two commodities which give the consumer same satisfaction. Let us understand this with the help of following indifference schedule, which shows all the combinations giving equal satisfaction to the consumer. A consumer can rank various combinations of goods and services in order of his preference. For example, if a consumer consumes two goods, Apples and Bananas, then he can indicate: 1. Whether he prefers apple over banana; or 2. Whether he prefers banana over apple; or 3. Whether he is indifferent between apples and bananas, i.e. both are equally preferable and both of them give him same level of satisfaction. Table 1: Indifference Schedule Combination ofapples Bananas Apples and(a) (B) Bananas P 1 15 Q 2 10 R 3 6 S 4 3 T 5 1 RAAK/BBA/DHARANIKUMARI.H/II YEAR/III Sem/UBA34/UNIT-2 Answer/ VER 2.0 Unit 2 Answer Page 4 of 22

19 As seen in the schedule, consumer is indifferent between five combinations of apple and banana. Combination P (1A + 15B) gives the same utility as (2A + 10B), (3A + 6B) and so on. When these combinations are represented graphically and joined together, we get an indifference curve IC 1 as shown in Fig In the diagram, apples are measured along the X-axis and bananas on the Y- axis. All points (P, Q, R, S and T) on the curve show different combinations of apples and bananas. These points are joined with the help of a smooth curve, known as indifference curve (IC 1 ). Every point on IC 1, represents an equal amount of satisfaction to the consumer. So, the consumer is said to be indifferent between the combinations located on Indifference Curve IC 1. The combinations P, Q, R, S and T give equal satisfaction to the consumer and therefore he is indifferent among them. 4. Outline the determinants of demand. ( April 2014) Determinants of Demand When the price changes, quantity demanded will change. That is a movement along the same demand curve. When factors other than price changes, demand curve will shift. These are the determinants of the demand curve. 1. Income: A rise in a person s income will lead to an increase in demand (shift demand curve to the right), a fall will lead to a decrease in demand for normal goods. Goods whose demand varies inversely with income are called inferior goods (e.g. Hamburger Helper). RAAK/BBA/DHARANIKUMARI.H/II YEAR/III Sem/UBA34/UNIT-2 Answer/ VER 2.0 Unit 2 Answer Page 5 of 22

20 2. Consumer Preferences: Favorable change leads to an increase in demand, unfavorable change lead to a decrease. 3. Number of Buyers: the more buyers lead to an increase in demand; fewer buyers lead to decrease. 4. Price of related goods: a. Substitute goods (those that can be used to replace each other): price of substitute and demand for the other good are directly related. 5. Expectation of future: a. Future price: consumers current demand will increase if they expect higher future prices; their demand will decrease if they expect lower future prices. b. Future income: consumers current demand will increase if they expect higher future income; their demand will decrease if they expect lower future income. 5. What are the differed types of utilities? Explain (Nov 2013) Meaning of Utility Within the world of "teaching marketing", and websites discussing the various "utilities of marketing", you'll find a variation on whether there are 4 or 5 Types, and sometimes different wordings of the type. 1. Form When someone makes something, they assemble a product from parts and you can use it. 2. Task When someone does something for you, like put ice cream in a cone, or change the oil in your car (some marketing education profs and websites don't use the word Task, they discuss "Promotion" or they merge the meaning of "task" into "form") 3. Time Making sure the product is available when people need it. 4. Place RAAK/BBA/DHARANIKUMARI.H/II YEAR/III Sem/UBA34/UNIT-2 Answer/ VER 2.0 Unit 2 Answer Page 6 of 22

21 Making sure the product is accessible, bring it to the customer, or have it in convenient place. 5. Possession Letting the customer has the product, usually after they pay, they can "possess" it and hold it, transport it etc. 6. Explain the concept of Income elasticity of Demand. ( Nov 2013) A negative income elasticity of demand is associated with inferior goods; an increase in income will lead to a fall in the demand and may lead to changes to more luxurious substitutes. A positive income elasticity of demand is associated with normal goods; an increase in income will lead to a rise in demand. If income elasticity of demand of a commodity is less than 1, it is a necessity good. If the elasticity of demand is greater than 1, it is a luxury good or a superior good. A zero income elasticity of demand occurs when an increase in income is not associated with a change in the demand of a good. These would be sticky goods. 7. Sate and explain the law of demand. ( Nov 2012) Definition of Law of Demand A microeconomic law that states, all other factors being equal, as the price of a good or service increases, consumer demand for the good or service will RAAK/BBA/DHARANIKUMARI.H/II YEAR/III Sem/UBA34/UNIT-2 Answer/ VER 2.0 Unit 2 Answer Page 7 of 22

22 decrease, and vice versa. The law of demand says that the higher the price, the lower the quantity demanded, because consumers opportunity cost to acquire that good or service increases, and they must make more tradeoffs to acquire the more expensive product. The chart below depicts the law of demand using a demand curve, which is always downward sloping. Each point on the curve (A, B, C) reflects a direct correlation between quantities demanded (Q) and price (P). So, at point A, the quantity demanded will be Q1 and the price will be P1, and so on. The law of demand is so intuitive that you may not even be aware of all the examples around you. When shirts go on sale, you might buy three instead of one. The quantity that you demand increases because the price has fallen. When plane tickets become more expensive, you re less likely to travel by air and more likely to choose the less expensive options of driving or staying home. The amount of plane tickets that you demand decreases to zero because the cost has gone up. 8. Evaluate the theory of consumer behavior. ( April 2012) Introduction of Consumer Behavior RAAK/BBA/DHARANIKUMARI.H/II YEAR/III Sem/UBA34/UNIT-2 Answer/ VER 2.0 Unit 2 Answer Page 8 of 22

23 The consumer behavior is demand permits us to determine the underlying factors affecting the level of consumer demand of a given commodity. An increase in the price of a commodity, we expect consumers to react by decreasing the quantity they want to buy. Consumer Behavior - Assumptions 1. Rational Consumer 2.Budget Constraints 3. Consumer Preferences The Utility Theory of Demand The utility theory explains consumer behavior in relation to the satisfaction that a consumer gets the moment he consumes a good. This theory was developed and introduced in 1870 by a British Economist, William Stanley Jevons. When we speak of utility in economics, we refer to the satisfaction or benefit that a consumer derives of his consumption. Law of Diminishing Marginal Utility The fundamental assumption of utility theory of demand is that the satisfaction that a person derives in consuming a particular product diminishes or declines as more and more of a good is consumed Indifference Preference Theory Another theory explaining consumer behavior is the indifference preference theory. Economist Vilfredo Pareto developed this modern approach to consumer behavior. Under this, that analysis of consumer behavior is described in terms of consumer preferences of various combinations of goods and services depending on the nature, rather than from the measurability of satisfaction in our previous discussion of the utility theory. RAAK/BBA/DHARANIKUMARI.H/II YEAR/III Sem/UBA34/UNIT-2 Answer/ VER 2.0 Unit 2 Answer Page 9 of 22

24 Indifference Curve An indifference curve is a locus of points each of which represents a combination of goods and services that will give equal level of satisfaction to a consumer. To illustrate this, we consider an individual who prefer a combination of 2 goods, say, food and clothing. Table 1. Indifference Schedule ( Food and Clothing) Budget Line The income of an individual acts as constraints on the qualities of bundles of goods he can purchase. We can buy commodities only up to the extent that our income allows us. In the same manner, do prices also constraints our ability to buy. With a fixed income, the higher the level of prices, the less will be the quantity we can purchase.. Budget Schedule and Changes in Income RAAK/BBA/DHARANIKUMARI.H/II YEAR/III Sem/UBA34/UNIT-2 Answer/ VER 2.0 Unit 2 Answer Page 10 of 22

25 Consumer Equilibrium Consumer equilibrium refers to the combination of goods that will give the highest level of satisfaction to a consumer that is within his purchasing power. PART C QUESTIONS 1. Explain consumer equilibrium using indifference curve analysis. ( April 2013) Understanding Consumer s Equilibrium by Indifference Curve Analysis! Consumer equilibrium refers to a situation, in which a consumer derives maximum satisfaction, with no intention to change it and subject to given prices and his given income. The point of maximum satisfaction is achieved by studying indifference map and budget line together. RAAK/BBA/DHARANIKUMARI.H/II YEAR/III Sem/UBA34/UNIT-2 Answer/ VER 2.0 Unit 2 Answer Page 11 of 22

26 Conditions of Consumer s Equilibrium: The consumer s equilibrium under the indifference curve theory must meet the following two conditions: (i) MRS XY = Ratio of prices or P X /P Y Let the two goods be X and Y. The first condition for consumer s equilibrium is that MRS XY = P X /P Y a. If MRS XY > P X /P Y, it means that the consumer is willing to pay more for X than the price prevailing in the market. As a result, the consumer buys more of X. As a result, MRS falls till it becomes equal to the ratio of prices and the equilibrium is established. b. If MRS XY < P X /P Y, it means that the consumer is willing to pay less for X than the price prevailing in the market. It induces the consumer to buys less RAAK/BBA/DHARANIKUMARI.H/II YEAR/III Sem/UBA34/UNIT-2 Answer/ VER 2.0 Unit 2 Answer Page 12 of 22

27 of X and more of Y. As a result, MRS rises till it becomes equal to the ratio of prices and the equilibrium is established. (ii) MRS continuously falls: The second condition for consumer s equilibrium is that MRS must be diminishing at the point of equilibrium, i.e. the indifference curve must be convex to the origin at the point of equilibrium. Unless MRS continuously falls, the equilibrium cannot be established. (i) MRS = Ratio of prices or P X /P Y : At tangency point E, the absolute value of the slope of the indifference curve (MRS between X and Y) and that of the budget line (price ratio) are same. Equilibrium cannot be established at any other point as MRS XY > P X /P Y at all points to the left of point E and MRS XY < P X /P Y at all points to the right of point E. So, equilibrium is established at point E, when MRS XY = P X /P Y. (ii) MRS continuously falls: RAAK/BBA/DHARANIKUMARI.H/II YEAR/III Sem/UBA34/UNIT-2 Answer/ VER 2.0 Unit 2 Answer Page 13 of 22

28 The second condition is also satisfied at point E as MRS is diminishing at point E, i.e. IC 2 is convex to the origin at point E 2. Explain the various factors determining the elasticity of demand. ( Nov 2012) Factors affecting the elasticity of demand of a commodity are as follows: A change in price does not always lead to the same proportionate change in demand. For example, a small change in price of AC may affect its demand to a considerable extent/whereas, large change in price of salt may not affect its demand. So, elasticity of demand is different for different goods. 1. Nature of commodity: Elasticity of demand of a commodity is influenced by its nature. A commodity for a person may be a necessity, a comfort or a luxury. RAAK/BBA/DHARANIKUMARI.H/II YEAR/III Sem/UBA34/UNIT-2 Answer/ VER 2.0 Unit 2 Answer Page 14 of 22

29 i. When a commodity is a necessity like food grains, vegetables, medicines, etc., its demand is generally inelastic as it is required for human survival and its demand does not fluctuate much with change in price. ii. When a commodity is a comfort like fan, refrigerator, etc., its demand is generally elastic as consumer can postpone its consumption. iii. When a commodity is a luxury like AC, DVD player, etc., its demand is generally more elastic as compared to demand for comforts. iv. The term luxury is a relative term as any item (like AC), may be a luxury for a poor person but a necessity for a rich person. 2. Availability of substitutes: Demand for a commodity with large number of substitutes will be more elastic. The reason is that even a small rise in its prices will induce the buyers to go for its substitutes. 3. Income Level: Elasticity of demand for any commodity is generally less for higher income level groups in comparison to people with low incomes. It happens because rich people are not influenced much by changes in the price of goods. 4. Level of price: Level of price also affects the price elasticity of demand. Costly goods like laptop, Plasma TV, etc. have highly elastic demand as their demand is very sensitive to changes in their prices. 5. Postponement of Consumption: Commodities like biscuits, soft drinks, etc. whose demand is not urgent, have highly elastic demand as their consumption can be postponed in case of an increase in their prices. 6. Number of Uses: If the commodity under consideration has several uses, then its demand will be elastic. When price of such a commodity increases, then it is generally put to only more urgent uses and, as a result, its demand falls. When the prices fall, then it is used for satisfying even less urgent needs and demand rises. 7. Share in Total Expenditure: Proportion of consumer s income that is spent on a particular commodity also influences the elasticity of demand for it. Greater the proportion of RAAK/BBA/DHARANIKUMARI.H/II YEAR/III Sem/UBA34/UNIT-2 Answer/ VER 2.0 Unit 2 Answer Page 15 of 22

30 income spent on the commodity, more is the elasticity of demand for it and vice-versa. 8. Time Period: Price elasticity of demand is always related to a period of time. It can be a day, a week, a month, a year or a period of several years. Elasticity of demand varies directly with the time period. Demand is generally inelastic in the short period. 9. Habits: Commodities, which have become habitual necessities for the consumers, have less elastic demand. It happens because such a commodity becomes a necessity for the consumer and he continues to purchase it even if its price rises. Alcohol, tobacco, cigarettes, etc. are some examples of habit forming commodities. 3. Describe the various methods of demand forecasting? ( April 2011) Techniques of Demand Forecasting The main challenge to forecast demand is to select an effective technique. There is no particular method that enables organizations to anticipate risks and uncertainties in future. Generally, there are two approaches to demand forecasting. The first approach involves forecasting demand by collecting information regarding the buying behavior of consumers from experts or through conducting surveys. On the other hand, the second method is to forecast demand by using the past data through statistical techniques. Thus, we can say that the techniques of demand forecasting are divided into survey methods and statistical methods. The survey method is generally for short-term forecasting, whereas statistical methods are used to forecast demand in the long run. RAAK/BBA/DHARANIKUMARI.H/II YEAR/III Sem/UBA34/UNIT-2 Answer/ VER 2.0 Unit 2 Answer Page 16 of 22

31 Survey Method: Survey method is one of the most common and direct methods of forecasting demand in the short term. This method encompasses the future purchase plans of consumers and their intentions. In this method, an organization conducts surveys with consumers to determine the demand for their existing products and services and anticipate the future demand accordingly. However, it has its own limitations, which are discussed as follows: a. Provides estimates that are dependent on the market skills of experts and their experience. These skills differ from individual to individual. In this way, making exact demand forecasts becomes difficult. b. Involves subjective judgment of the assessor, which may lead to over or under-estimation. c. Depends on data provided by sales representatives who may have inadequate information about the market. ii. Delphi Method: Refers to a group decision-making technique of forecasting demand. In this method, questions are individually asked from a group of experts to obtain their opinions on demand for products in future. These questions are repeatedly asked until a consensus is obtained. iii. Market Experiment Method: Involves collecting necessary information regarding the current and future demand for a product. This method carries out the studies and experiments on consumer behavior under actual market conditions. In this method, some RAAK/BBA/DHARANIKUMARI.H/II YEAR/III Sem/UBA34/UNIT-2 Answer/ VER 2.0 Unit 2 Answer Page 17 of 22

32 areas of markets are selected with similar features, such as population, income levels, cultural background, and tastes of consumers. Statistical Methods: Statistical methods are complex set of methods of demand forecasting. These methods are used to forecast demand in the long term. In this method, demand is forecasted on the basis of historical data and cross-sectional data. These different statistical methods are shown in Trend Projection Method: Trend projection or least square method is the classical method of business forecasting. In this method, a large amount of reliable data is required for forecasting demand. In addition, this method assumes that the factors, such as sales and demand, responsible for past trends would remain the same in future. Barometric Method: In barometric method, demand is predicted on the basis of past events or key variables occurring in the present. This method is also used to predict various economic indicators, such as saving, investment, and income. Econometric Methods: Econometric methods combine statistical tools with economic theories for forecasting. The forecasts made by this method are very reliable than any other method. RAAK/BBA/DHARANIKUMARI.H/II YEAR/III Sem/UBA34/UNIT-2 Answer/ VER 2.0 Unit 2 Answer Page 18 of 22

33 The different types of statistical measures (as shown in Figure-14) are discussed as follows: iii. Index Number: Refers to the measures used to study the fluctuations in a variable or group of related variables with respect to time period/base period. They are most commonly used in economics and financial research to study various factors, such as price and quantity of a product. The factors that are responsible for the problem are identified and calculated. Time Series Analysis: Refers to the analysis of a series of observations over a period of equally spaced time intervals. For example analyzing the growth of a company from its incorporation to the present situation. Time series analysis is applicable in various fields, such as public sector, economics, and research. 4. Briefly explain the law of diminishing marginal Utility Analysis. ( Nov 2013) Law of diminishing marginal utility (DMU) states that as we consume more and more units of a commodity, the utility derived from each successive unit goes on decreasing. In making choices, most people spread their incomes over different kinds of goods. People prefer a variety of goods because consuming more and more of any one good reduces the marginal satisfaction derived from further RAAK/BBA/DHARANIKUMARI.H/II YEAR/III Sem/UBA34/UNIT-2 Answer/ VER 2.0 Unit 2 Answer Page 19 of 22

34 consumption of the same good. This law expresses an important relationship between utility and the quantity consumed of a commodity. Let us understand this law with the help of an example: Suppose your father has just come from work and you offer him a glass of juice. The first glass of juice will give him great satisfaction. The satisfaction with the second glass of juice will be relatively lesser. With further consumption, a stage will come, when he would not need any more glass of juice, i.e. when the marginal utility drops to zero. After that point, if he is forced to consume even one more glass of juice, it will lead to disutility. Such a decrease in satisfaction with consumption of successive units occurs due to Law of diminishing marginal utility. 1. Cardinal measurement of utility: It is assumed that utility can be measured and a consumer can express his satisfaction in quantitative terms such as 1, 2, 3, etc. 2. Monetary measurement of utility: It is assumed that utility is measurable in monetary terms. 3. Consumption of reasonable quantity: It is assumed that a reasonable quantity of the commodity is consumed. For example, we should compare MU of glassfuls of water and not of spoonful s. If a thirsty person is given water in a spoon, then every additional spoon will yield him more utility. So, to hold the law true, suitable and proper quantity of the commodity should be consumed. 4. Continuous consumption: It is assumed that consumption is a continuous process. For example, if one ice-cream is consumed in the morning and another in the evening, then the second ice-cream may provide equal or higher satisfaction as compared to the first one. 5. No change in Quality: Quality of the commodity consumed is assumed to be uniform. A second cup of ice-cream with nuts and toppings may give more satisfaction than the first one, if the first ice-cream was without nuts or toppings. RAAK/BBA/DHARANIKUMARI.H/II YEAR/III Sem/UBA34/UNIT-2 Answer/ VER 2.0 Unit 2 Answer Page 20 of 22

35 6. Rational consumer: The consumer is assumed to be rational who measures, calculates and compares the utilities of different commodities and aims at maximising total satisfaction. 7. Independent utilities: It is assumed that all the commodities consumed by a consumer are independent. It means, MU of one commodity has no relation with MU of another commodity. 8. MU of money remains constant: As a consumer spends money on the commodity, he is left with lesser money to spend on other commodities. In this process, the remaining money becomes dearer to the consumer and it increases MU of money for the consumer. But, such an increase in MU of money is ignored. 9. Fixed Income and prices: It is assumed that income of the consumer and prices of the goods which the consumer wishes to purchase remain constant.. Diagrammatic Explanation of Law of DMU: Let us understand the law with the help of Table Units of IceTotal Utility (inmarginal Utility (in Cream utils) utils) (Point of Satiety) Table 2.2: Law of Diminishing Marginal Utility RAAK/BBA/DHARANIKUMARI.H/II YEAR/III Sem/UBA34/UNIT-2 Answer/ VER 2.0 Unit 2 Answer Page 21 of 22

36 In the diagram, units of ice-cream are shown along the X-axis and MU along the Y-axis. MU from each successive ice-cream is represented by points A, B, C, D and E. As seen, the rectangles (showing each level of satisfaction) become smaller and smaller with increase in consumption of ice-creams. RAAK/BBA/DHARANIKUMARI.H/II YEAR/III Sem/UBA34/UNIT-2 Answer/ VER 2.0 Unit 2 Answer Page 22 of 22

37 UBA34-MANAGERIAL ECONOMICS Syllabus: [Regulation: 2012] UNIT III Production and cost analysis-law of return to scale and economies of scale cost analysis-different concept-cost-outputs relationship-short run long run-revenue curves of firmsupply analysis.. PART A QUESTIONS AND ANSWERS 1. Define long run costs. ( April 2013) 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. 2. What is mean by cost reduction? ( April 2013) The process of looking for, finding and removing unwarranted expenses from a business to increase profits without having a negative impact on product quality. Many business managers will engage in periodic cost reduction drives in order to make their company's operation more efficient and to boost profits. 3. Mention the law of supply. (April 2011) Decrease in input prices Improvements in technology Government Policy Size of the market Time Expectations 4. What you mean by Actual cost. ( April 2011) An actual amount paid or incurred, as opposed to estimated cost or standard cost. In contracting, actual costs amount includes direct labor, direct material, and other direct charges. RAAK/BBA/H.Dharanikumari/II YEAR/III Sem/UBA34/UNIT-3 QA/VER 1.0 Unit 3 Answer Page 1 of 17