View more. Each of these courses is equal to 6 credits. These questions can also be used by any students for improving their knowledge in Managerial Economics. Define Managerial Economics. Managerial economics is a specialized discipline of management studies which deals with application of economic theory and techniques to business management. Please select an account to continue using cracku. MBA Mocks. Very elaborative notes on various topics with real life examples and diagrams and case studies.
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Start enhancing your skills and performance to solve the MBA Exams. Questions and answers. HR Interview. At the end of your MBA interview, you will have the opportunity to ask the interview panel questions. Calculate the average product of labor, APL, when the level of capital is fixed at 16 units and the firm uses 16 units of labor. Answers and illustration of analyses are provided for these questions. In the strict sense ,production function is defined as the transformation of physical input in to physical out put where out put is a function input.
Where Q- Is the quantity of out put produced during a particular period K, L etc are the factors of production f -denotes the function of or depends on. Perfect divisibility of both inputs and out put; 2.
Limited substitution of one factor for the others 3. Constant technology; and 4. Inelastic supply of fixed factors in the short run Cobb-Douglas Production Function. One of the important tool of statistical analysis in production function that measures the relation between change in physical input is cob-Douglas production function.
The concept was originated in USA. This is more peculiar to manufacturing concerns. Returns to scale are constant. That is if factors of production are increased, each by 10 percentage then the output also increases by 10 percentage The laws of production Production function shows the relationship between a given quantity of input and its maximum possible out put. Given the production function, the relationship between additional quantities of input and the additional output can be easily obtained.
This kind of relationship yields the law of production The traditional theory of production studies the marginal input-output relationship under I Short run; and II long run. In the short run, input-output relations are studied with one variable input, while other inputs are held constant.
In the long run input output relations are studied assuming all the input to be variable. Law of Diminishing Returns Law of Variable Proportions The Laws of returns states the relationship between the variable input and the output in the short term.
By definition certain factors of production e. Such factors which are available in unlimited supply even during the short periods are known as variable factor.
In short-run there fore ,the firms can employ a limited or fixed quantity of fixed factors and an unlimited quantity of the variable factor. In other words, firms can employ in the short run varying quantities of variable inputs against given quantity of fixed factors. This kind of change in input combination leads to variation in factor proportions.
The Law which brings out the relationship between varying factor properties and output are there fore known as the Law of variable proportions.. The variation in inputs lead to a disproportionate increase in output more and more units of variable factor when applied cause an increase in output but after a point the extra output will grow less and less. The Law states that when some factor remain constant ,more and more units of a variable factor are introduced the production may increase initially at an increasing rate; but after a point it increases only at diminishing rate.
Land and capital remain fixed in the short-term whereas labour shows a variable nature. With one variable input. Average product is the product for one unit of labour.
It is arrived at by dividing the Total Product TP by number of workers Marginal product is the additional product resulting term additional labour. It is found out by dividing the change in total product by the change in the number of workers. The total output increases at an increasing rate till the employment of the 4th worker.
The rate of increase in the marginal product reveals this. Any additional labour employed beyond the 4th labour clearly faces the operation of the Law of Diminishing Returns. The maximum marginal product is 16 after which it continues to fall , ultimately becoming negative. Thus when more and more units of labour are combined with other fixed factors the total output increase first at an increasing rate then at a diminishing rate finally it becomes negative.
The total output TP curve has a steep rise till the employment of the 4th worker. This shows that the output increases at an increasing rate till the employment of the 4th labour. TP curve still goes on increasing but only at a diminishing rate. Finally TP curve shows a downward trend. The Law of Diminishing Returns operation at three stages. At the first stage, total product increases at an increasing rate. The marginal product at this stage increases at an increasing rate resulting in a greater increases in total product.
The average product also increases. This stage continues up to the point where average product is equal to marginal product. At the second stage , the total product continues to increase but at a diminishing rate. As the marginal product at this stage starts falling ,the average product also declines. The second stage comes to an end where total product become maximum and marginal product becomes zero. The marginal product becomes negative in the third stage.
So the total product also declines. The average product continues to decline in the third stage. Assumptions of Law Diminishing Returns The Law of Diminishing Returns is based on the following assumptions;- Returns is based on the following assumptions;- 1.
The production technology remains unchanged 2. The variable factor is homogeneous. Any one factor is constant 4. The fixed factor remains constant. Law of Returns to scale In the long —run all the factor of production are variable ,and an increase in output is possible by increasing all the inputs. The Law of Returns to scale explains the technological relationship between changing scale of input and output. The law of returns of scale explain how a simultaneous and proportionate Increase in all the inputs affect the total output.
The increase in output may be proportionate , more than proportionate or less than proportionate. If the increase in output is proportionate to the increase in input , it is constant Returns to scale. If It is less then proportionate it is diminishing returns to scale.
The increasing returns to the scale comes first ,then constant and finally diminishing returns to scale happens. Increasing Returns to scale When proportionate increase in all factor of production results in a more than proportionate increase in output and this results first stage of production which is known as increasing returns to scale.
Marginal output increases at this stage. Higher degree of specialization, falling cost etc will lead higher efficiency which result increased returns in the very first stage of production. Constant Returns to scale Firms cannot maintain increasing returns to scale indefinitely after the first stage , firm enters a stage when total output tends to increase at a rate which is equal to the rate of increase in inputs.
This stage comes in to operation when the economies of large scale production are neutralized by the diseconomies of large scale operation. Diminishing Returns to Scale In this stage ,a proportionate increase in all the input result only less than proportionate increase in output. This is because of the diseconomies of large scale production. When the firm grows further, the problem of management arise which result inefficiency and it will affect the position of output.
Increasing returns to scale operates because of economies of scale and decreasing returns to scale operates because of diseconomies of scale where economies and diseconomies arise simultaneously. Increasing returns to scale operates when economies of scale are greater then the diseconomies of scale and returns to scale decreases when diseconomies. Similarly when economies and diseconomies are in balance ,returns to scale becomes constant. When a firm increases all the factor of production it enjoys the same advantages of economies of production.
The economies of scale are classified as ; 1. Internal economies. External economies Internal economies of scale Internal economies are those which arise form the explanation of the plant-size of the firm. Internal economies of scale may be classified;- a Economies in production.
Economies in production :-it arises term 1. Technological advantages 2. Advantages of division of labour and specialization B. Economies in marketing;-It facilitates through 1. Large scale purchase of inputs. Advertisement economies ; 3. Economies in large scale distribution 4. Other large-scale economies C. Managerial economies ;- It achieves through 1. Specialization in management 2. Mechanization of managerial function. Economies in transport and storage Economies in transportation and storage costs arise form fuller utilization of transport and storage facilities.
External Economies of scale External or pecuniary economies to large size firms arise from the discounts available to it due to; 1. Large scale purchase of raw materials 2. Large scale acquisition of external finance at low interest 3. Lower advertising rate fun advertising media. Concessional transport charge on bulk transport. Lower wage rates if a large scale firm is monopolistic employer of certain kind of specialized labour Managerial Economics-I Sem.
Economies of scale will not continue for ever. Expansion in the size of the firms beyond a particular limit , too much specialization, inefficient supervision, Improper labour relations etc will lead to diseconomies of scale.
Isoquant curve. An iso- quant curve is locus of point representing the various combination of two inputs —capital and labour —yielding the same output. It shows all possible combination of two inputs, namely- capital and labour which can produce a particular quantity of output or different combination of the two inputs that can give in the same output.
An isoquant curve all along its length represents a fixed quantity of output. The following table illustrates combination of capital K and labour L which give the same output sayunits. Thus it provides fixed level of output. Further the shape of isoquants reveal the degree of substitutability of one factor for another to yield the same level of output.
It also implies the diminishing marginal rate of technical substitution. Marginal rate of technical substitution refers to the rate at which one output can be substituted for another in order to keep the output constant. The slope of an isoquant indicates the marginal rate of technical substitution at the point. Properties of Isoquants 1. Isoquants have a negative slope:-An isoquant has a negative slope in the economic region or in the relevant range.
Economic region means where substitution between input is technically possible that keeps same output. Isoquants are convex to origin:- Convex nature of Isoquant shows the substitutability of One factor for another and the diminishing marginal rate of technical substitution 3. Isoquant cannot Intersect or be tangent to each other Marginal Rate of Technical substitution MRTS MRTS is the rate at which marginal unit of an input can be substituted for the marginal units of the other input so that the level of output remains the same.
In other words it is the ratio of marginal unit of labour substituted for the marginal units of capital without affecting the total output. This ratio indicates the slop of Isoquants Isocost Curve Isocost curve shows the different combination that a firm can buy with a certain an unit of money. Further ,management is expected to know price of inputs what it costs to produce a given output.
Therefore, it is required to minimize the cost of output that it produces. Here management is more helpful to draw isocost curve that represents the equal cost. An iso-cost line is so called because it shows the all combinations of inputs having equal total cost. The isocost lines are straight lines which represents the same cost with different input combinations. Suppose a firm decides to spend Rs.
If one unit of labour costs Rs. Similarly, If a unit of capital cost Rs. The figure shows that the firm has the option to spend the total money either on capital or labour or on both, from this Rs.
An isocost curve represents the same cost for all the different combination of inputs. A certain quantity of output can be produced with different Input combinations.
Optimum input combination is that which bears least cost. Thus the input combination that results in the minimum cost of production is to be found out. This is known as least - cost input combination. This can be found out by combining Isoquant curves and Isocost curves. The production function is represented by Isoquant curve and the cost function is represented by Isocost curve. The least cost combination exists at a point where Isoquant is tangent to Isocost. K2 Rs. At this point in the combination is OP of capital and OQ of labour.
Any other point on Iq1, would mean the same output ,but at high cost. The law of variable proportion was first explained by…………. Labour is…………….. The technical relation between a given set of inputs and the output is called …………… 5. All inputs become ……………. Each question carries a weightage of One 1.
Define production function? Distinguish between fixed and variable inputs? State the Cobb-Douglas production function? Explain the term Law of return? What is meant by economies of scale? State the tern isoquants? What is Marginal Rate of Technical Substitution? Each question carries a weightage of Two 1. Explain the peculiarities of factors of production? Explain the law of variable proportion? Distinguish between isoquants and isocosts? Explain the input —output relationship?
Discuss the term optimum combination of inputs? Each question carries a weightage of One-four 1. Briefly explain the concept of Law of diminishing returns? Discuss its assumption and importance? Explain the various economies and diseconomies of scale? Price affects profit through its effect both on revenue and cost.
It always depends on cost and volume of sales. Therefore the management always tries to find out the optimum combination of price and output which offers the maximum profit to the firm.
Thus pricing occupies on important place in economic analysis of firms. The knowledge of market and market structure with which a firm operates is more helpful in price output decisions. Market in economic term means a meeting place where buyers and sellers deal directly or indirectly. Market structures are different market forms based on the degree of competition prevailing in the market.
Broadly the market forms are classified into two types:- 1. Perfectly competitive market 2. Imperfectly competitive market Perfect Competition The term perfect competition is used in wider sense. The following are the characteristics of perfectly competitive market 1.
Large number of buyers and sellers in the market 2. Homogeneous product 3. Free entry or exit 4. All the buyers and sellers in the market have perfect knowledge about the market conditions. Perfect mobility of factor of production 6. Absence of transportation costs. When the first three assumptions are satisfied there exists pure competition.
In perfect competition ,the demand for the output for each producer is perfectly elastic. With the larger number of firms and homogeneous products, no individual firm is in a position to influence the price. Equilibrium Price The demand curve normally slopes downwards showing that more quantity of commodity will be demanded at a lower price than at a higher prices.
Similarly supply curve showing an upward trend where the producers will offer to sell a larger quantity at a higher price than at a lower price. Thus the quantity demanded and quantity supplied vary with price. The price that tends to settle down or comes to stay in the market where both buyers and sellers are satisfied is at which quantity demanded equals quantity supplied. The point so formed is known as equilibrium point and price is known as equilibrium price. The following are the market periods based on time- market period, short period and long period.
Very short period Market period 2. Short period 3. Long period Market period or very short period may be only a day or very few days.
Change in supply is not possible where the period is very short and quantity demanded will be the determining factor in this period Further, supply curve in the market period is remain fixed showing vertical straight line.
The short period is a period not sufficient to make any changes in the existing fixed plant capacity. Increase in supply in the short period is possible by increasing the variable factors of production only The supply curve slopes upward to right showing that some increase in supply is possible when the price increases. Long period is a time long enough to adjust the supply to any changes in demand. The long run supply curve is less steep then short run supply curve showing increase in quantity supplied when price changes.
Price determination Under perfect competition In perfect competition the market price of a commodity is determined by its demand and supply. The price of a commodity determines at the point where quantity demanded equates quantity supplied.
It can be explained through the following diagram. Demand and supply curves slopes in opposite direction. In this diagram OP is the equilibrium price where the demand curve equates with the supply curve.
In this figure , the point E determines the equilibrium price and OQ is the equilibrium quantity. So MN will be excess supply. It the firm can minimizes the price, the profit will be low. Thus we can say that at the point of equilibrium firm can derive maximum profit.
At the point of equilibrium, there are two conditions to be satisfied. Under perfect competition ,the following equations are satisfied. The firms under perfect competition will be the cost efficient size or optimum size which gives the lowest possible average cost of production per unit.
During the Market period In very short period ,supply is inelastic ,thus the price depends on changes in demand. The supply curve will be vertical straight line parallel to y-axis. It means where ever the price is ,the fixed supply is to be sold in the market. Here DD is the demand curve.
The supply is SQ. Here the demand alone determines the price because supply is fixed. If the commodity is non- perishable, It can be stored. The seller does not sell the goods if the price is low.
But the price is high he will sell whole stock. The curve will be curved at beginning ;then it will become a straight line. Under very short period , the demand alone determines the price. During short period In this period ,the firm can make slight changes in their supply of goods without changing the capacity of plant. But the quantity will be decreased from OQ to OQ2.
The firm in the short run can produce output by increasing the variable inputs. The price determination by the industry is given in the following diagram. The price determination is explained through the diagram given below; In output decision making in the long run. Demand curve and S 1 S1 short run supply curve. The price is determined at OP. In the figure 2,the equilibrium output is at point E. At this point. In brief, monopoly is a market situation in which there is only one seller or producer of a product for which no close substitution is available.
As there is only one firm under monopoly ,that single firm constitutes the whole industry. The monopolist can fix price of his product and can pursue an independent price policy. A monopolist can take the decision about the price of his product. For ex:- electricity , water supply companies etc. Features The following are the important features of monopoly :- 1.
One seller and a large number of buyers. No close substitutes for the product. Monopolist is not the price taker and the price maker. Monopolist can control the supply. No entry of new firm to the market. Firm and industry are the same Causes of Monopoly 1. Legal restrictions 2.
Exclusive ownership or control over the raw materials. Economies of large scale production 4. Exclusive knowledge of a production technique. Price Determination under Monopoly A monopoly firm has complete control over the entire supply. It can sell different quantities at different prices.
It can sell more if it cuts down its price. Thus the monopoly firm faces a downward sloping demand curve or average revenue AR curve. As the single firm constitutes the industry the demand curve of the monopoly firm and the industry will be the same. Since average revenue falls when more units of output are sold marginal revenue will be less than average revenue. MR curve thus declines at a greater rate than. AR curve and it falls below AR curve.
Though the monopolist has the freedom to fix any price he will prefer a price output combination that gives him maximum profit.. He goes on producing so long as additional units add more to revenue than to cost He will stop at that point beyond which additional units of production add more to cost than to revenue. The total profit is equal to product of profit per unit with total output. The following are the result of monopoly operation in the market If AR greater than AC-results super normal profit If AR equals AC results normal profit If AR less than AC that results loss to the firm Long run Monopoly Equilibrium The monopolist is the single producer and the new firms cannot cuts the industry which enables the monopolist to continue to earn super profit in the long run.
In the long run. If the cost is at an increasing trend. This will help him to make maximum profit. Difference between perfect competition and Monopoly 1. Under perfect competition there are many sellers but in the case of monopoly , there is only one seller 2.
Individual seller has no control over the market supply in the case of perfect competition. But in the case of Monopoly individual seller controls the supply. Products are identical in the case of perfect competition, but there is only one product in the case of Monopoly. Under perfect competition, there are free entry and exit of firms. But the Monopolist blocks the entry. The Monopolist discriminates the price but there is uniform price in perfect competition.
Firm and Industry is different in the case of perfect competition, they are same in the case of Monopoly. Monopolistic Competition In the present World market, it can be seen that there is no monopoly and there is no real competition. There is a mix up of the two.
This situation is generally known as Monopolistic competition. H Chemberlin of America, Monopolistic Competition means a market situation In which competition is imperfect. The products of the firms under monopolist competition , are mainly close substitutes to each other. The following are the important features of Monopolistic Competition. There are large numbers of producers or sellers 2. It deals with differentiated products. There are free entry and exit of firms to the markets.
The selling cost determines the demand for the products. There is no association of firms 6. There is no price competition. There is lack of knowledge of the market. Price and Output decisions under Monopolistic Competition Short run period In short run ,each existing firm is a monopolist having a downward sloping demand curve for its product. Long —Run Period In the long period, normal profits will disappear. New firms will enter the industry and consequent expansion of output will decrease the price and only normal profit are made by the firms.
Which he individually places upon the market. According to J. Further ,they may produce homogeneous or differentiated products. It has the following features: 1. The firms are inter dependent in decision making. Advertising should be effective. Firms should have group behavior.
Indeterminateness of demand curve. The number of firms or producers or sellers are very small. Product are identical or close substitutes to each other 7. There is an element of Monopoly Price Determination Under Oligopoly Pricing many be in condition of independent pricing ,Pricing under price leadership and pricing under collusion.
Independent pricing Kinked Demand Model or Price rigidity Model Kinked demand curve was first introduced by prof Paul M Sweezy to explain price rigidity under oligopoly. An oligopolist always guesses about his competitors reaction. They assume that if one decides to decrease the price , the others will also reduce the price. The assumption behind the kinked curve is that each oligopolist will act and react in a way that keep condition tolerable for all the members of the industry.
If one firm reduces the price of the product ,the others will be compelled to reduce the price. But some times, If one increases the price, the other will not increase the price. The firms in Oligopoly do not increase the prices due to the possibility of losing the customers to rivals who do not raise their prices. Firms usually do not change their price in response to small changes in costs. The kinked demand curve has two segments i. The price prevailing in the market is OP and the firm produces OQ output.
D, M is the relatively elastic of the demand curve and MD Is the relatively inelastic portion. This difference in the elasticities of demand due to the particular competitive reaction pattern assumed by the Kinked demand Curve hypothesis. Pricing under Price Leadership The price leadership means the leading firm determines the price and others follow it.
All the firms in the industry adjusts , the price fixed by the price leader. The large firm , who fixes the price , is known as the price maker and the firms, who follow it are known as price —takers.
The price leadership may be four types. They are : 1. Dominant price leadership :-In this situation , there exists many small firms and one large firm and the large firm fixes the price and the small firms in the market accept that price. Barometric Price Leadership :- Under this situation one reputed and experienced firm fixes the price and others may follow it.
Aggressive Price Leadership :—Under this market condition, one dominating firm fixes the price and they compel all others in the industry to follow the price.
Effective Price Leadership :- Under this condition , there are small number of firms in the industry. Price -Output determination Under Price Leadership In order to determine the price and output under price leadership. They are, 1. There are two firms —L and F, in which the cost of production of L is less than that of F and 2.
Product are identical The following diagram will give the clear picture of price output determination. To avoid the competition among the firms, monopolistic firms arrive at a formal agreement called cartel. It is common sales agency formed to eliminate competition and fix such a price and output that will maximize profit of member firms. The firms output and price are determined by this cartel. The following diagram will give the idea more clear or to make an assumption that there are only two firms viz.
MR is Marginal Revenue Curve. The equilibrium output of two firms are determined based on this own MC curve. The share of output of each firm will be obtaining by drawing a parallel line through E to the X axis. The points E1 and E2 determines the level of output for the firm S and the firm T respectively.
He enjoys the control of supply of the product. A monopolist is able to charge different price for his products to the different customers. This is known as price discrimination. According to Mrs. This is also known as differential pricing Managerial Economics-I Sem. Price relatively elastic portion of the demand curve of the first degree —charging different price for different persons for the same product.
Price discrimination of the second degree —Under this, the buyers are classified into different divisions. Price discrimination of the third degree —Here , the markets are divided according to elasticity of demand Conditions of Price Discrimination There are three conditions to be satisfied to apply the price discrimination They are : 1.
There must be more than one separate market 2. The markets must have different elasticity of demand 3. The market should be such that no buyer of the market may enter the other market and vice versa Dumping When monopolist works in home market as well as foreign market, he is able to discriminate the price between these two markets. Saaka Issahaq. A short summary of this paper. Download Download PDF. Translate PDF. Managerial Economics-I Sample Exam Questions Instructions: This document contains five questions from previous mid-term exams of Managerial Economics, and is intended as a sample of the content and level of difficulty to be expected in the exam of the course Managerial Economics-I.
Answers and illustration of analyses are provided for these questions. The instructions page of the mid-term exam for Managerial Economics in is also provided as a guideline of the number of questions and time allowed to be expected in the exam of the course Managerial Economics-I.
Instructions: 1. This is a closed-book and individual exam. You should write your student number and name in the space provided above. There are 30 questions and you have minutes. Each question has only one correct answer.
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