Q.1.

Why is Managerial Economics being considered a central part of each functional area of
management ? Explain.
Ans.
Managerial economics is a social science discipline that combines the economics theory,
concepts and known business practices in order to make the process of decision making easy. It
is a very useful concept for every manager that is planning for the future. A key area of
managerial economics is the theory of a firm that involves the best mix of the scarce resources to
maximize profits within the firm.

APPLICATION OF MANAGERIAL ECONOMICS :
Managerial economics can be used to achieve virtually all the goals of a business organisation in
an efficient manner. Typical managerial decision-making may involve one of the following
issues: Decisions pertaining to the price of a product and the quantity of the commodity to be
produced

Decisions regarding manufacturing product/part/component or outsourcing to/purchasing from
another manufacturer
Choosing the production technique to be employed in the production of a given product
Decisions relating to the level of inventory of a product or raw material a firm will maintain
Decisions regarding the medium of advertising and the intensity of the advertising campaign
Decisions pertinent to employment and training
Decisions regarding further business investment and the modes of financing the investment.
It should be noted that the application of managerial economics is not restricted to profit-seeking
business organizations. Tools of managerial economics can be applied equally well to decision
problems of nonprofit organizations.

Q3- McDonalds restaurants do the bulk of their business at lunchtime, but have found
that promotionally-
priced meals at breakfast and dinner make a significant profit contribution. Does the success of
McDonalds restaurants in this regard reflect an effective application of the marginal profit concept or the
incremental profit concept? Explain.
Ans.
The success of McDonalds restaurants in offering promotionally-priced breakfast and
dinner items reflects an effective application of the incremental profit concept.
Marginal profit refers to the increase in total profit following a single-unit increase in output. On
the other hand, incremental profit refers to the increase in total profit due to a relevant managerial decision
that may involve a multiple-unit expansion in output.


Q.4. Suppose a production possibilities frontier includes the following data points:
Data Point Cars Washing Machines
A 0 1,000
B 100 600
C 200 0
a. What is the cost of producing an additional car when 150 cars are being produced?
b. What is the cost of producing an additional washing machine when 50 cars are being
produced? When 150 cars are being produced?
Ans.

a. The cost of a car when 150 cars are produced is 6 washing machines. In the segment AB
of this PPF, as you move from 100 to 200 cars, you must forgo 600 washing machines.
Thus, each additional car costs 600/100 = 6 washing machines along segment AB of this
PPF.
b. The cost of an additional washing machine when 150 cars are produced is one-sixth of a
car. In the segment AB, as you move from 0 to 600 washing machines, you must forego
100 cars. (100/600) = 1/6
When 150 cars are produced, only 300 washing machines are produced.