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Managerial Economics






Question No 1 2 3 4 5 6 7 8 9 10 Total



1. Discuss the scope of managerial economics. How will the subject be beneficial to you? 10Marks From the point of view of a firm, managerial economics, may be defined as economics applied to problems of choice or alternatives and allocation of scarce resources by the firms. Thus managerial economics is the study of allocation of resources available to a firm or a unit of management among the activities of that unit. The scope of managerial economic can be outlined and explained below: The business firm and its objectives Demand analysis, estimation and forecasting Production and Cost analysis Pricing theory and policies Profit analysis with special reference to break-even point Capital budgeting for investment decisions Competition. Demand analysis and forecasting help a manager in the earliest stage in choosing the product and in planning output levels. A study of demand elasticity goes a long way in helping the firm to fix prices for its products. The theory of cost also forms an essential part of this subject. Estimation is necessary for making output variations with fixed plants or for the purpose of new investments in the same line of production or in a different venture. The firm works for profits and optimal or near maximum profits depend upon accurate price decisions. Theories regarding price determination under various market conditions enable the firm to solve the price fixation problems. Control of costs, proper pricing policies, breakeven analysis, alternative profit policies are some of the important techniques in profit planning for the firm which has to work under conditions of uncertainty. Thus managerial economics tries to find out which course is likely to be the best for the firm under a given set of conditions.

2. Explain the various methods of demand forecasting for a new product.10-marks The methods of demand forecasting for a new product rely on an intensive study as the organization has no existing data on which to rely. There are six approaches or methods of demand forecasting for new products. Evolutionary approach explores the demand for a new product as an outgrowth of a existing product. The demands of the old product can be taken into account when forecasting demand of the new product. Substitute approach has the new product serving as a substitute for an old product. The demand for the new product can be calculated based on demand for the old product. Opinion poll approach uses information from potential buyers who are contacted directly. Their responses are used for demand forecasting. Sales experience approach offers the new product for sale in a sample market and bases forecasts on experience in that sampled location. Growth curve approach looks at the rate of growth and the ultimate level of demand to form an estimation based on growth patterns of established products. Vicarious approach uses the information provided by market experts who provide feedback on how they feel that new products will perform. 3. Explain the changes in market equilibrium and effects of shifts in supply and demand.10marks If there is a change in the supply curve or demand curve, changes in market equilibrium will occur. Demand shifts when there is a change in demand determinants. If demand raises, the demand curve shifts upward and to the right. A rise in demand can be counteracted with a rise in price. Supply varies directly with the change in price. A rise in price causes a rise in supply; a decrease in price, causes a decrease in supply. Where demand and supply intersect, the equilibrium price is established. The rate of change in supply and demand determines the change in market equilibrium. If the rate of change in demand matches that of the rate of change in supply, there will be no change in market equilibrium. If the decrease in demand is greater than the decrease in supply, there will be no change in market equilibrium.

4. Discuss the law of variable proportion and its practical application.10marks It has three phases: (a) diminishing returns (b) constant returns, and (c) increasing returns Diminishing return . It is a basic natural law affecting many phases of management of a farm business. It is a law of fundamental importance in agriculture. This law describes the relationship between output and a variable input when other inputs are held constant. The law can be stated as follows: "If increasing amounts of one input are added to a production process while all other inputs are held constant, the amount of output added per unit of variable input will eventually start decreasing." It states that if the quantity of one factor is increased with quantities of other factors held constant, the marginal increment to the total product may increase or remain constant at first but will eventually decrease after a certain point. The operation of this law can be, however, delayed by improvements in technology and /or improvement in managerial ability. Ultimately this law must operate in the practical world. The level to which yields per acre , milk per cow or weight per poultry bird should be pushed are the kind of questions which involve the law of diminishing returns. It is, thus, an important point in farming to decide the level to which a farmer should push his output per acre or per cow, etc. to secure the maximum possible profit.

Constant returns: It means each marginal unit of a variable resource adds the same amount of the output to the total production. Though diminishing marginal productivity is the rule, constant productivity is frequently observed when no resource is fixed and all are increased together in the same proportion. For example, another acre may be as productive as the first with same inputs. If one acre of wheat requires 20 man-hours of labour, 30 kgs. Of seed and 13 inches of irrigation water and yields 10 quintals of wheat, the second acre will require additional 20 man-hours of labour, 30 kgs. Of seed and 13 inches of irrigation water and will also yield 10 quintals of wheat. The second acre is just as productive. The marginal or added production from each increase in resource input is the same: this is a case of constant productivity. Another case is when one or more resources are fixed but have excess capacity. For example, family labour or a farmer may not be fully employed. A storage go down may have surplus capacity. A tractor may be big enough to control 50 acres holding but the farmer may have only 27 acres. If variable input is added to such a resource-mix situation, constant returns may result. Under constant productivity, each unit input increase is just as profitable as another. Under such conditions the profit rule is: If production is profitable on first unit, keep producing till the constant returns hold. Do not produce at all, if production is not profitable on first unit. . Increasing returns: There are few cases in farming business where increasing productivity may be found. Increasing productivity means added resources give increasing returns. This relationship may hold only over a very limited range of production and is applicable when

all resources are increased together and not when some resources are fixed. For example, a cattle shed constructed for 30 cows may cost more per cow than if one is constructed for 60 cows, the cost involved in the latter case may not be double because of some economies on account of joint walls etc., but the gross returns per cow might be the same. The diagram below can explain more:

Applicability of the Law of Variable Proportion: The Law of Variable Proportion has universal applicability in any branch of production. It forms the basis of a number of doctrines in economics. The Malthusian theory of population stems from the fact that food supply does not increase faster than the growth in population because of the operation of the law of diminishing returns in agriculture. Ricardo also based his theory of rent on this principle. According to him rent arises because the operation of the law of diminishing return forces the application of additional doses of labor and capital on a piece of land. Similarly the law of diminishing marginal utility and that of diminishing marginal physical productivity in the theory of distribution are also based on this theory. The law is of fundamental importance for understanding the problems of underdeveloped countries. In such agricultural economies the pressure of population on land increases with the increase in population. This leads to declining or even zero or negative marginal productivity of workers.

5. Differentiate between profit maximization model and marries growth maximizing model.10marks Profit Maximization model means a scenario where the business is run by the motive of profit making and keep the cost low. It can also be described as the rational behavior of equilibrium assumption. Any firm which aiming at profit maximization model; will go increasing its output till it reaches maximum profit output. Profit is known nothing but differences between total revenue and total cost. The more the differences between total revenue and total cost will create maximum profit. So, the equilibrium for a firm will be when there is maximum difference between the total cost and total revenue. Profit maximization is a traditional objective of a firm. Marris Growth Maximization Model: Robin Marris is the developer of the model. According to this theory, modern firms are managed by both the manager and the shareholders. A manager aims to maximize the rate of growth of the firm and the shareholders will try to maximize the dividend and the increase the share price. 6. Recently most countries have experienced the problem of inflation. What do you think are the causes, How will this problem affect the daily life of the public? can you suggest some measures to control it?10marks There are multiple causes of inflation: increase money supply, increase in disposable income, increase in private consumption expenditure and investment expenditure, increase in exports, black money, increase in foreign exchange reserves, increase in population growth, high rates of indirect taxes, reduction in rates of direct taxes, decrease in level of savings. There are also supply side causes of inflation: shortage in supply of factors of production, law of diminishing returns, hoarding by speculators, hoarding by consumers, trade unions leading to industrial unrest, war or other calamities, international factors like high price of imports, and an increase in the price of inputs. Expectations can also contribute to inflation as they can lead to increased price of goods. In Africa, many of the causes of inflation are related to war or other political instability, corruption (black money), an increase in disposable income, international factors including the role of foreign money, an increasing population, and the high price of imports. These factors, and inflation in general, lead to a change in standard of living. People are less able to purchases things as the skewed distribution of wealth and goods grows more disparate. Inflation makes life more difficult for those who earn a fixed income. Inflation can also have political effects and can result in greater unrest as people become unhappy with the costs of things and how much they can purchase.

Inflation can be controlled, in part, through government work. The government can develop policies to fight corruption. Policies can also be developed regarding what can be exported and in what quantity. Tax rates can be modified to help control the effect of inflation and gain funding to strengthen the government. Population growth can be controlled through available family planning services. Incentives can be created to help people save rather than spend money. The money supply can be controlled by the government. Some level of inflation may be inevitable, but with careful planning by the government, companies, and investors, it can be controlled.