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Solved Assignment July-Dec 2016

MS-09 (SAMPLE COPY)

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Course Title
Assignment Code
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MS-09
Managerial Economics
MS-09/ TMA/SEM - II/2016
All Blocks

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1. Describe Incremental Cost. Differentiate between Incremental Cost and Equi- Marginal Principle.
Explain how does consumer maximize utility with the help of Equi-Marginal Principle?
Incremental CostAn incremental cost ----------------------------------------------------------------------------------------------- production or other activity.
For instance, if a company's total -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- hours is $40,000.
The incremental cost is also referred to as the differential cost. The incremental cost is the relevant cost for making a short run
decision between two alternatives.
Incremental cost can be defined as the ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------might
not exist if an extra unit was not produced.
Example
A very simple example of incremental ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------cost for
shipping the additional widget to a consumer.
Calculating Incremental Cost
Calculating the incremental cost is helpful for the business to determine their proper production amounts. The key steps involved
in computation of the incremental cost are:
1. Review the formula for -------------------------------------------------------------------------------------------------------) Total cost of
producing two total cost of producing one = incremental cost.
2. Determine the amount incurred as the cost -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------of producing one item. Let us assume the cost of producing one good be $500.
3. Determine the cost of producing two items. Due to economies of scale, it might cost less in producing two items than what
was incurred in producing each ---------------------------------------------------------------------- two items simultaneously.
4. Estimate the incremental cost by computing the difference between the two figures. The result is: total cost of producing two
($950) total cost of ------------------------------------------------------------------------------------------- item and two items.

Differentiate between Incremental Cost and Equi- Marginal Principle


Incremental principle:
It is related to the marginal ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------may be at stake in the decisions.
The two basic components of incremental reasoning are

Incremental cost
Incremental Revenue

The incremental principle may be stated as under:


A ------------------------------------- one if
it increases ------------------------------------------ costs
---------------------------------- extent than it increases others

it increases ----------------------------------------decreases others and


it ----------------------------------------- revenues

Equi marginal Principle:


This principle deals with the allocation of an available ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------in all cases. This
generalization is called the equi-marginal principle.
Suppose, a firm has 100 units of labor at its disposal. The firm is engaged in four activities which need labors services, viz,
A,B,C and D. it can enhance any one of these activities by adding more labor but only at the cost of other activities.
The strict usage of incremental and ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------terms
help to guide critical thinking and make for better decision outcomes.

How does consumer maximize utility with the help of Equi-Marginal Principle
The equi-marginal principle states that consumers will choose a combination of goods to maximise their total utility. This will
occur where
(Marginal Utility of A)

--------------------

--------------------------------
(Price of B)

The consumer ------------------------------------------------------------- goods and the price.


In effect the consumer is evaluating the MU/price.
This is known ------------------------------------------------------------------ item of good.
In the real world, a -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- income in purchasing two goods so as to maximize his total utility? The law of equimarginal utility tells us the way how a consumer maximizes his total utility.
Before elaborating this law, let us assume:
a. The consumer acts rationally.
b. Tastes and preferences, money income, prices of goods, etc., remain constant.
The equi-marginal principle is based on the law of diminishing marginal utility. The equi-marginal principle states that a
consumer will be maximizing his total utility when he allocates his fixed money income in such a way that the utility derived
from the last unit of money spent on each good is equal.
Suppose a man ----------------------------------------------------------------------------------------------------------------------------------------------------- on X has the same utility as the last unit of money spent on Y and the person thereby maximizes his satisfaction.
Only when this is true, the consumer will not be distributing his money in buying good X and Y, since by reallocating his
expenditure he cannot increase his total utility.
This condition for a --------------------------------------------------------------- following form:
MUX/PX = MUY/PY
So long as MUY/PY is higher than -------------------------------------------------- the marginal utilities of both X and Y are equalized.

The marginal utility per rupee spent is ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------his


limited income when the marginal utility per rupee spent is equal for all goods.
Example:
This equi-marginal principle or the ---------------------------------------------------------------------------------------------------------------------------------------- the different units consumed. Let us also assume that prices of X and Y are Rs. 4 and Rs. 5, respectively.

MUX and MUY schedules show ----------------------------------------------------------------------------------------------------------------------------- prices we obtain weighted marginal utility or marginal utility of money expenditure. This has been shown in Table 2.7.

MUX/PX and MUY/PY are equal to 6 ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------of any


other combination other than this involves lower volume of satisfaction.

2. A firms demand function is given as P=32-6Q and the average cost function as AC=Q2 7.5Q+50+2/Q.
Calculate the level of output Q which:a) Maximizes total revenue

a) Since demand ---------------------------------------- function will be,


TR

=PXQ
-----------------------------------------------------= --------------------------------------

To maximise TR, we find the derivative and set it to 0 (the first order or necessary condition)
Now, dR/dQ = ------------------------------------= 32 12 Q = 0
Thus, -------------------------------------The second order condition (sufficient condition) needs
--------------------------------------Since
dR/dQ

= ---------------------------------

-------------------------------------------

which is ----------------------------------------------------- when output is ----------------------------.


b) Maximizes profits

p =TR TC
------------------------------------------------------= (Q2 7.5Q + 50 + ------------------------------------------------------------TR = -------------------------------------------------------= 32 Q 6 Q2
After substituting TR and TC, we get
p=

(32 Q 6 Q2) ----------------------------------------------------

------------------------------------------- + 7.5 Q2 - 50 Q 2

- Q3 + 1.5 -----------------------------------

dP/dQ = -------------------------------------------------

-3Q2 + -------------------------------------------Divide by -3
-----------------------------------

=0

Q2 3Q + ----------------------------

=0

----------------------------------- ( Q 3 ) = 0
(Q + 2---------------------------------

=0

---------------------------------------------Thus maximising point where ----------------------------------

3. Discuss Long- Run Cost Functions. Why long run cost curve is called a planning curve and explain
how does it help in future decision making process?
Long run costs are ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------. The land, labor, capital
goods, and entrepreneurship all vary to reach the the long run cost of producing a good or service.
The long run is a planning and implementation stage for producers. -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------a company, and entering or leaving a market. Source: Boundless.


In the long run, all inputs are variable, and a --------------------------------------------------------------------------------------------------------------------------------------------- since no inputs are fixed. A useful way of looking at the long run is to consider it a planning
horizon. The long run cost curve is also called planning curve because it helps the firm in future decision making process.

The long run cost output relationship can be shown with the help of a long run cost curve. The long run average cost curve
(LRAC) is derived from short run average cost -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------.
The long run average cost function for this firm is defined by the minimum average cost of each level of output.
For example, output rate Q1 could be produced by the plant size-1 at an average cost of C1 or by plant size-2 at a cost of C2.
Clearly, the average cost is lower for plant size-1, and thus point a is one point on the long run average cost curve. By repeating
this process for various rates of output, the long run ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------. Consider a firm currently operating plant size-2 and producing Q1 units at a cost of C2 per unit. If output is expected to
remain at Q1, the firm will plan to adjust to plant size-1, thus reducing average cost to C1.
In the long run, all the factors ---------------------------------------------------- plant or building can be increased in case of long run.
There are no fixed inputs or ---------------------------------------------- costs change as all the factors of production are variable.
There is no distinction between the Long run Total Costs (LTC) and long run variable cost as there are no fixed costs. It should
be noted that the ability of an organization of changing inputs enables it to produce at lower cost in the long run.
1. Long Run Total Cost:
Long run Total Cost (LTC) refers to the --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------quantities of output. LTC is always less than or equal to short run total cost, but it is never more than short run cost.
The LTC curve is shown in Figure-10:

As shown in Figure-10, short run total -------------------------------------------------------------------------------------------------------------------------------------------------------------- of short run total cost curves. Therefore, LTC envelopes the STC curves.

2. Long Run Average Cost:


Long run Average Cost (LAC) is equal to --------------------------------------------------------------------------------------------------------------------------------------------------------------- In the short run, plant is fixed and each short run curve corresponds to a particular
plant. The long run average costs curve is also called planning curve or envelope curve as it helps in making
organizational plans for expanding production and achieving minimum cost.
Figure-11 shows the derivation of LAC curve:

Suppose there are three sizes of the plant -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------. However, in the long run, the organization
can select among the plants which help in achieving minimum possible cost at a given level of output.
From Figure-11, it can be noted that till OB amount of production, it is beneficial for the organization to operate on the plant
SAC2 as it entails lower costs -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------. The LAC curve
is derived from joining the lowest minimum costs of the short run average cost curves.
It first falls and then rises, thus it is U- shaped curve. --------------------------------------------------------------------------------------------------------------------------- in inputs. In the long run, the output changes with respect to change in all inputs of production.
In case of increasing returns to scale (IRS), ----------------------------------------------------------------------------------------------------------------------------------------- of constant returns to scale (CRS), organizations can double the output by using inputs twice.
LTC increases proportionately to the output; ---------------------------------------------------------------------------------------------------------------------------- more than twice. Thus, LTC increases more than the increase in output. As a result, LAC increases.
Figure-12 shows the effect on LAC because of returns to scale:

As shown in Figure-12, up to M------------------------------------------------------------------------------------- On the other hand, at M,


LAC becomes constant. After M, LAC slopes upwards implying DRS.
3. Long Run Marginal Cost:
Long run Marginal Cost (LMC) is ------------------------------------------------------------------------------- when all inputs are
variable. This cost is derived from short run marginal cost. On the graph, the LMC is derived from the points of tangency
between LAC and SAC.
LMC curve can be learned through Figure-13:

If perpendiculars are drawn -------------------------------------------------------------- curves at P, Q, and R respectively. By joining P,


Q, and R, the LMC curve would be drawn. It should be noted that LMC equals to SMC, when LMC is tangent to the LAC.
In Figure-13, OB is the output at which:
SAC2 = SMC2 = LAC = LMC
We can also draw the relation between LMC and LAC as follows:
When LMC < LAC, LAC falls
When LMC = ---------------------------------------------------When LMC > LAC, LAC rises

4. Why is there a kink in the market demand curve of oligopolists? Explain price rigidity of the Kinked
Demand Curve.
Kinked-Demand Theory of Oligopoly
There are two forms of oligopoly structure;
i.

Collusive Oligopoly: In such oligopoly few firms unite together through a formal or informal agreement. The example
for formal agreement is cartels --------------------------------------------------------------------------- model.

ii.
ii. Non-Collusive Oligopoly: If the firm ------------------------------------------------------------------------------------------- mutual
understanding or without collaboration with any other firm then such oligopolistic firm is non-collusive.
There is no single theory of oligopoly. The ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------face
two market demand curves for its product. At high prices, the firm faces the relatively elastic market demand curve, labelled MD
1 in Figure.

Corresponding to MD 1 is the marginal revenue curve labelled MR 1. At low prices, the firm faces the relatively inelastic market
demand curve labelled MD 2. Corresponding to MD 2 is the marginal revenue curve labelled MR 2.
The two market demand curves ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------revenue with
marginal cost, which results in an equilibrium output of Q units and an equilibrium price of P.
The oligopolistic faces a kinked-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------elastic market
demand curve MD 1.

The oligopolies market demand curve -------------------------------------------------------------------------------------------------------------------------------------------------------- by the other oligopolists in the market. Consequently, the demand for the oligopolies
output falls off more quickly at prices above P; in other words, the demand for the oligopolies output becomes more elastic.
If the oligopolistic reduces its price below P, it is assumed ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------the price changes of its competitors.
The kinkeddemand theory of oligopoly illustrates the high degree of interdependence that exists among the firms that make up
an oligopoly. The market demand curve --------------------------------------------------------------------------------- of the other firms in
the oligopoly; this is the major contribution of the kinkeddemand theory.
The kinkeddemand theory, however-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------collude in
setting output and price. The possibility of collusive behavior is captured in the alternative theory known as the cartel theory of
oligopoly.

Price rigidity under OligopolyEvery firm in an oligopoly market is -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------. The main factors which contribute to price
rigidity in an oligopoly market are discussed below:
Firstly under oligopoly each seller is faced with a Kinked Demand Curve. The point of kink divide the demand or AR curve into
two distinct parts. ---------------------------------------------------------------------------------------------------------- curve. The lower part
or the portion of demand curve to the right of the kink is less elastic. The market price corresponds to the point of the kink.
The price that corresponds to the -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------oligopoly, faced with the Kinked Demand Curve is
extremely reluctant to change the prevailing price. Therefore, there is rigidity or stickiness of the prevailing price under
oligopoly.
Secondly, since the oligopolistic firm is -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------of output and price which corresponds to the
kink, the oligopolist is not interested in changing the price.
Thirdly, small variations in cost do not ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- revenue at a point above E, there is a case for
price rise.
Fourthly, the price remains same even when ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- range of discontinuity or gap in the new marginal revenue curve.

Price rigidity of the Kinked Demand Curve

Our study of pricing and market structure has so far suggested that a firm maximizes profit by setting MR = MC. While this is
also true for oligopoly firms, it needs to be supplemented by other behavioural features of firm rivalry. This becomes necessary
because the distinguishing feature of oligopolistic ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------if a firm reduces the price of its products whereas they show the non-cooperative behaviour if a firm increases the price of its
products.
Let us start from P1 in Figure 13.3. If one firm ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------curve, DD, then the price reduction from P1 to P2 only increases sales to Q2 1.

Here we assume that P1 is the initial price of ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------existing price P1. The demand curve has two linear curves, which are joined at price P.

Associated with the kinked demand curve is a ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------The new MC curve will be MC1 or MC2 and will remain in the discontinued area and the equilibrium price remains the same at
P.

5. Briefly describe the characteristics of perfect competition, monopoly, monopolistic competition, and
oligopoly markets. Identify any four products one each from these markets.
Perfect competition
A perfectly competitive market is a hypothetical market where competition is at its greatest possible level. classical economists
argued that perfect competition would produce the best possible outcomes for consumers, and society.

Key characteristics
Perfectly ----------------------------------------------------------------- characteristics:
1.

There is perfect knowledge------------------------------------------------------------------------------------------------ is freely


available to all participants, which means that risk-taking is minimal and the role of the entrepreneur is limited.

2.

Given that producers and consumers have perfect knowledge, it is assumed that they make rational decisions to
maximise ------------------------------------------------------------------------------------------------------- their profits.

3.

There are no barriers to entry ------------------------------------------------------------------.

4.

Firms --------------------------------------------------------------------------------------- not branded.

5.

Each unit of input-------------------------------------------------- homogeneous.

6.

No single firm can influence the market price, or market conditions. The single firm is said to be a price taker, taking its
price from the whole industry. ---------------------------------------------------------------------------------------------------------------------------------------------------------------- market price given that it can sell all it produces at the market price.

7.

There are very many ----------------------------------------------------------------------------------------------- to entry.

8.

There is no need for government regulation, except to make markets more competitive.

9.

There are ---------------------------------------------------------------------------------------------------------- in the transaction.

10. Firms can only make -----------------------------------------------------------------------------------profits in the short run.


ExampleThis is an economic situation that -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------they are
buying. There is little to prevent someone from joining in on the selling or quitting the market altogether.

MonopolyMonopoly refers to a market ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- the single seller of the commodity has some kind of
power or control over the supply of a commodity and hence he is in a position to influence the price.
Since under monopoly, there is only one firm selling a commodity, this firm exercises some control over the supply and price of
the commodity.
Characteristics of Monopoly:
1. Single seller:
The producer or seller of the ---------------------------------------------------------------------- control on the output of the commodity.
2. No Close Substitutes:
All the units of a commodity are similar and there are no substitutes to that commodity.
3. No Entry for New Firms:
Monopoly situation in a market ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------. This signifies
that under monopoly there is no difference between a firm and an industry.

4. Profit in the Long Run:


A monopolist can earn ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------to a competitive firm,
other firms will enter the competition with the result abnormal profits will be eliminated.
5. Losses in the Short Period:
Generally, a common man thinks that a monopoly firm cannot incur loss because it can fix any price it wants. However, this
understanding is not correct. A monopoly firm can sustain losses equal to fixed cost in the short period. A monopolist means that
there is only a single person or a firm to sell the commodity.
6. Nature of Demand Curve:
Under monopoly the demand -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------decreases.
Therefore, demand curve (AR) slopes downwards to the right. The nature of demand curve has been shown in the diagram. DD
is demand curve, which has a negative slope.
7. Price-discrimination:
From the point of view of ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- the policy of price discrimination
on various bases such as charging different prices from different consumers or fixing different prices at different places etc.
8. Firm is a Price-Maker:
A competitive firm is a ------------------------------------------------------------------------------------------------------------------- power.
This is not true in the case of a monopoly firm because it has market power. Hence, it is a price maker
9. Average and Marginal Revenue Curves:
Under monopoly, average -------------------------------------------------------------------------------------------------------------------------------------------------------- would decline when sale increases. In that case MR would be less than AR. (ii) AR slopes downwards
to the right and is greater than MR.

ExampleA market dominated by one seller. The cable company is an example of this in India (sort of like it is in America.) The cable
company in India, facing no competition, is notorious for poor quality and poor service.

Monopolistic competitionThe concept of monopolistic -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------firms produce


differentiated products which are close substitutes of each other.
The manufacturer of Colgate has got the --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------is the real market structure than either pure competition or monopoly.
Important characteristics of monopolistic competition
1. Existence of large number of firms:

The first important feature of -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- of firms under monopolistic competition, there exists stiff competition
between them. These firms do not produce perfect substitutes. But the products are close substitute for each other.
(2) Product differentiations:
The various firms under ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------of each other.
Differentiation of the product may be real or fancied.
(3) Some influence over the price:
As the products are close substitutes of ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- increases. It therefore, implies that the demand curve of a
firm under monopolistic competition slopes downward and marginal revenue curve lies below it.
Thus under monopolistic competition a --------------------------------------------------------------------------------------------------------------------- price. Thus under monopolistic competition a firm has to choose a price-output combination that will maximize price.
(4) Absence of firm's interdependence:
Under oligopoly, the firms ------------------------------------------------------------------------------------------------------------------------------------- or less independently. Each firm formulates its own price-output policy upon its own demand cost.
(5) Non-price competition:
Firms under monopolistic -------------------------------------------------------------------------------------------------------------------------------- definite -methods of competing rivals other than price. Advertisement is a prominent example of non-price competition.
(6) Freedom of entry and exit:
In a monopolistic competition it is easy for new firms to enter into an existing firm or to leave the industry. Lured by the profit
of the existing firms new firms enter the industry which leads to the expansion of output. But there exists a difference.
ExampleHere, there are lots of sellers ------------------------------------------------------------------------------------------------------------------------------------------------------ of this is the banking system. After financial sector reforms in 1992, the banking system in India
have become much more competitive with lots more banks offering similar products at similar prices.

Oligopoly MarketThe term oligopoly is -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------or producing product


which are close but not perfect substitutes of each other.
There is no such border line between a few and many. Usually oligopoly is understood to prevail when the numbers of sellers of
a product are two to ten. Oligopoly is of two types-oligopoly without product differentiation or pure. Oligopoly and oligopoly
with product differentiation.
Characteristics of Oligopoly:
1. Interdependence:
The firms under oligopoly are ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------can fail to take
into account the reaction of other firms to its price and output policies. There is, therefore, a good deal of interdependences of the
firm under oligopoly.

2. Importance of advertising and selling costs:


The firms under oligopolistic -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------. But such
expenditure is the life-blood of an oligopolistic firm.
3. Group behaviour:
Another important feature of oligopoly is the analysis -of group behaviour. In case of perfect competition, monopoly and
monopolistic competition, the business firms are assumed to behave in such a way as to maximize their profits. The profitmaximizing behaviour on his part may not be valid. The firms under oligopoly are interdependent as they are in a group.
4. Indeterminateness of demand curve:
This characteristic is the direct ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------price. As a
result, the demand curve facing an oligopolistic firm losses its determinateness.
The demand curve as is well known, relates to the various quantities of the product that could be sold it different levels of prices
when the quantity to be sold is itself unknown and uncertain the demand curve can't be definite and determinate.
5. Elements of monopoly:
There exist some elements of monopoly under oligopolistic situation. Under oligopoly with product differentiation each firm
controls a large part of the market by producing differentiated product. In such a case it acts in its sphere as a monopolist in
lining price and output.
6. Price rigidity:
Under oligopoly there is the existence ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------oligopolistic condition.
ExampleA situation where there are only a few sellers in a particular economy who control a particular commodity. They can, therefore,
influence prices and affect the competition. In India, an example of this would be mobile telephony - There are only a few
operators, examples of which are: Airtel, Idea, BSNL, Reliance

6. Write short notes on the following:a) Direct and Indirect Costs


Direct Costs and Indirect Costs
Manufacturing costs may be classified as direct costs and indirect costs on the basis of whether they can be attributed to the
production of specific goods, services, departments or not.
Direct Costs
Direct costs can be -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------cost may be direct cost for one cost object but indirect cost for
another cost object.
Most direct costs are variable but this may not always be the case. For example--------------------------------------------------------------------------------------------------------------------------------- direct fixed cost incurred on the building.
Examples: Cost of gravel, sand, -------------------------------------------------------------------------- production of concrete.

Indirect Costs
Costs which cannot be ----------------------------------------------------------------------------------------------------------------------------------------------------- to individual products, activities or departments etc.
Examples: Cost of depreciation---------------------------------------------------------------- incurred in a concrete plant.

Example
Following costs are incurred by a factory on the production of identical cupboards:
1.
3.
5.
7.
9.
11.

Laborers' wages
--------------------------Nails and screws
Handles, --------------------Supervisors' salaries
--------------------------

2.
4.
6.
8.
10.
12.

---------------------------Glass
Factory insurance
Wood
-------------------------------Factory manager's salary

Classify the above costs as direct or indirect.

Solution
1.
3.
5.
7.
9.
11.

Direct
---------Indirect
Direct
--------------Indirect

2.
4.
6.
8.
10.
12.

Direct
-------------Indirect
Direct
-----------------Indirect

===========================================================================================

b) Price Leadership
If changes are usually or always introduced by a firm and -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------of these firms. Each firm in the oligopoly recognises this interdependence.
A major policy change on the part of one ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Oligopoly tends to reduce the freedom of
action a firm has in taking its price decision because the firm is not sure of the reactions of its rivals.
One way to come out of this uncertainty --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- the help of product differentiation. An equal popular alternative
for the firm is to deliberately choose a pattern of price parallelism, i.e., one firm taking the initiative role or leadership.
Example:
Scooter-Bajaj Auto LML, TVS Motor Cycles------------------------------------------------------------------------------------------------------------------ make the collusion of firms imperfect. Most important form of imperfect collusion is Price Leadership.
Kinds:
Types of Price leadership:
There are three kinds of price leadership.
(i) Dominant firm price leadership:
A large firm is the dominant firm ---------------------------------------------------------------------------, i.e., the large firm fixes the
price and other small firms act as Price-takers.
Example:
SAIL vis-a-vis TISCO in Steel Sector.

(ii) Collusive Price leadership:


Collusive price leadership may --------------------------------------------------------------------------------------------------------------------------------------------------------------------------- change initiated by the dominant firm.
Example:
Price cartel through Manufacturers Association.
(iii) Barometric Price Leadership:
Barometric Price leadership gets its -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------to impose
his decisions on other firms in the industry, his leadership may thus be short lived.
Example:
Mukund Iron & Steel in the Steel ------------------------------------------- SAIL, but it is the lowest cost steel producer in the world.
Advantage of Price Leadership:
(i) One most important advantage ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------facilitates
development of new products and improvement in quality.
(ii) Price leadership eliminates the possibility of a price-war.
(iii) Price leadership involves an -------------------------------------------- strategy for oligopoly firms to stay and grow together.
===========================================================================================

c) Peak Load Pricing


Peak load pricing is a type of third----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------vary with
time
Peak-load pricing is a pricing technique applied to public goods, which is a particular case of a Lindahl equilibrium. Instead of
different demands for the same public good, we consider the demands for a public good in different periods of the day, month or
year, then finding the optimal capacity (quantity supplied) and, afterwards, the optimal peak-load prices.
This has particular applications in public goods -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------during off peak time. It is charged
more to encourage the customers with flexibility of usage to shift the usage to off peak time where there is excess sparable
capacity available. Telephone companies use a similar schedule.
The below mentioned article provides quick notes on peak-load pricing.
It is a form of inter-temporal price discrimination based on efficiency.
For goods and services, demand peaks -------------------------------------------------------------------------------------------------------------------------------------- rush hours, for electricity during late afternoon and so on.
MC is also high during these peak periods because of capacity constraints. Prices should, thus, be higher during peak periods as
Fig. 9.13 shows, where D1 is the demand curve for the peak period, and D2 is the demand curve for non-peak period.
The firm sets MC = MR for each ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

-------------------------------------------------------------------------------------------------------------------------------------------profit above
what it would be if it charged one price for all periods. It is also efficient; the sum of producer and consumers surplus is greater
because prices are closer to MC.

Peak-load pricing is ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------by setting MC = MR for


each period as Fig. 9.13 shows.
For example, a movie theatre, which ----------------------------------------------------------------------------------- for theatres, the MC
of serving customers during the matinee show is independent of the MC during the evening.
The owner of a movie ------------------------------------------------------------------------------------------------------------------------------------------------------------- independently, using estimates of demand in each period and of MC.

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