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# PES UNIVERSITY

MANAGERIAL ECONOMICS
UM15MB501
INTERNAL TEST 1
SOLUTION

(3 Marks)

## Defined clearly 3 marks

o Inverse relation between price and quantity demanded
o Cetirus paribus

## 1.b. Describe the process of Managerial Decision Making

Define Decision making to be equivalent in meaning to the following Decision making is the process
of making choices by setting goals, gathering information, and assessing alternative choices . 1 marks
Steps in decision making process the below points to be includes with one-two line explanation - 6 marks
i. Define the problem.
ii. Identify limiting factors.
iii. Develop potential alternatives.
iv. Analyze the alternatives.
v. Select the best alternative.
vi. Implement the decision.
vii. Establish a control and evaluation system

## 2.a. Calculate the MC if the TC=100Q3 - 20Q2 + 45

(7 Marks)

(3 Marks)

formula 1 mark
d/dq (TC) = d/dq (100Q3 - 20Q2 + 45) Step 1 mark
300 Q2 20Q is solution 1 mark

2.b. Government observes that the import of certain Chinese products are affecting the local sellers. So it is
planning to levy an import duty on these products. It is observed that the ep=2.5 for these products. If the
price of the product is Rs 350, at which the Quantity demanded is 50000 units, what must be the tax if the
government wants to reduce the import by 60%?
(7 Marks)

## Formula of elasticity of price Marshall method 1 mark

Steps 5 marks
Correct solution : P2 = 434 , tax = 84, tax% = 24% 1 mark

## 3.a. What is Law of Diminishing Marginal Utility? Explain with an example.

(5 Marks)

Defining the Law : The more we have of a thing, the less we want additional increments of it or the more
we want not to have additional increments of it. the meaning of the written definition must include key
words as per the definition given here. - 2 marks
Diminishing marginal utility graph

Example 1 mark

2 marks

(5 Marks)

## Giffen Goods Defining and explanation 2.5 marks

A consumer good for which demand rises when the price increases, and demand falls when the price decreases.
These goods violates the law of demand, whereby demand should increase as price falls and decrease as price
rises. To be a Giffen good, the item must lack easy substitutes. It must be an inferior good, or a good for which
demand declines as the level of income in the economy increases

## Veblen goods defining and explanation 2.5 marks

Certain goods are purchased by the customers because it gives them the satisfaction of certain status symbol and
are preferred because they are not purchased commonly by common people. The Demand for these goods
increases with the increase in their price, because higher prices confer greater status. These goods do not obey
the law of demand. These are normally Luxury good. Thorstein Bunde Veblen observed that certain goods
which are Luxury goods are purchased because they signify status symbol. These goods do not obey the law of
demand and their demand increases with the increase in price even when similar products are available at lower
price. This is known as Veblen Effect.
4.a. Explain with graph, how a Consumer Equilibrium is reached with help of IC and Budget Lines
Marks)

(5

An indifference curve is a graph showing combination of two goo ds 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. Higher IC denotes higher levels of Satisfaction. Graphical representation of various IC
Curves is called IC Map.
Budget line is a graphical representation of all possible combinations of two goods which can be purchased with
given income and prices, such that the cost of each of these combinations is equal to the money income of the
consumer. Alternately, Budget Line is locus of different combinations of the two goods which the consumer
consumes and which cost exactly his income.
The term consumers equilibrium refers to the combination of the quantity of goods and services which the
consumer may buy in the market given his income (budget Line) and given prices of goods in the market, which will
derive maximum Satisfaction (IC). A consumer is said to be in equilibrium at a point where the price line is touching
the highest attainable indifference curve from below. Income-consumption curve is the locus of points showing
the consumption bundles chosen at each of various levels of income of different product combination.
4.b Explain the Concept of Shift in Demand Curve.

(5 marks)

## Expansion and contraction of demand with graphs 5 marks

The Change in the quantity demanded can be due to various factors affecting the demand. However, when the
quantity demand change is due to the price changes, it is called as Change in Quantity Demanded. Reduction
in Quantity demanded due to increase in price leads to Contraction and increase in Quantity demanded due to
decrease in price is called Expansion/extention The Changes happen along the demand curve itself.

## Increase and decrease in demand with graphs 5 marks

The Change in the demanded can be due to any other factors affecting the demand, while the price is constant is
called as Change in Demanded. Reduction in demand due to change in variables other than price leads to
Decrease in Demand and increase in demanded due to change in variables other than price is called Increase
in Demand. The change in demand results in shift of demand curve upwards (increase) or downwards
(decrease).
5.a. What is Incremental Analysis?
(3 marks)
Incremental analysis is generalization of marginal concept. It refers to changes in cost and revenue due to a policy
change. Change in output due to change in process, product or investment is considered as incremental change. 3
marks for definition.
5.b. What is Price Elasticity of Demand? Explain the types of Price Elasticity of demand with demand graphs.
(10 Marks)
Defining Price Elasticity of demand 1 mark
Price Elasticity of demand is defined as the proportionate change in the Quantity demanded of a product for
the proportionate change in the Price of the product.
It is the Sensitivity of the change on the quantity demanded to the change in the Price of the product.

## Price Elasticity of Demand=

%ChangetheQuantity Demanded
%Changethe Price of the Product

## Mentioning 5 types of elasticity 1 marks

a. Perfectly Price Elastic Demand
b. Relatively Price Elastic Demand
c. Unitary Price Elasticity
d. Relatively Price Inelastic Demand
e. Perfectly Price Inelastic Demand

## Graphs and explanation of all types 8 marks

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