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IGNOU MBA MS-09 Solved Assignments July 2010

Course Code : MS- 09Course Title : Managerial EconomicsAssignment Code : 9/TMA/SEM-II/2010Coverage : All Blocs

Attempt All the uestions!

1! "A #lose $el%tionship &et'een m%n%gement %nd e#onomi#s h%sled to the development o( m%n%ge$i%l e#onomi#s!) *+pl%in this

st%tement

Solution, Managerial economics is the use of economic moes of

thought to anal!"e #usiness situations.$%ouglas& 'Managerial economics(

is concerne )ith the a**lication of economic *rinci*les an

methoologies to the ecision ma+ing *rocess )ithin the firm or

organi"ation uner the conitions of uncertaint!$. S*encer an Siegelman

efine it as The integration of economic theor! )ith #usiness *ractices

for the *ur*ose of facilitating ecision ma+ing an for)ar *lanning #!

management.$ Managerial economics is the a**lication of economic

theor! an anal!sis to *ractice of #usiness firms an other institutions.$ ,

common threa runs through all these escri*tions of managerial

economics )hich is using a frame)or+ of anal!sis to arri-e at informe

ecisions to maimi"e the firm(s o#/ecti-es& often in an en-ironment of

uncertaint!. It is im*ortant to recogni"e that ecisions ta+en )hile

em*lo!ing a frame)or+ of anal!sis are li+el! to #e more successful than

ecisions that are +nee /er+ or gut feel ecisions.

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0conomic acti-it! is the constant effort to match ens to means #ecause

of scarcit! of resources. The o*timal economic acti-it! is to maimise the

attainment of ens& the means an their scarcities or to minimise the use

of resources& gi-en the ens an their *riorities.

%ecision ma+ing #! management is trul! economic in nature #ecause it

in-ol-es choices among a set of alternati-es 1 alternati-e courses of

action. The o*timal ecision ma+ing is an act of o*timal economic

choice& consiering o#/ecti-es an constraints. This /ustifies an

e-aluation of managerial ecisions through conce*ts& *rece*ts& tools an

techni2ues of economic anal!sis of the follo)ing t!*es.

0conomics has e-elo*e se-eral conce*ts an anal!tical tools to eal

)ith the 2uestion of allocation of scarce resources among com*eting

ens. The non1tri-ial *ro#lem that nees to #e aresse is ho) an

econom! through its -arious institutions sol-es or ans)ers the three

crucial 2uestions *ose a#o-e. There are three )a!s #! )hich this can #eachie-e. One& entirel! #! the mar+et mechanism& t)o& entirel! #! the

go-ernment or finall!& an more reasona#l!& #! a com#ination of the first

t)o a**roaches. 3ealisticall! all economies em*lo! the last o*tion& #ut

the relati-e roles of the mar+et an go-ernment -ar! across countries. or

eam*le& in Inia the mar+et has starte *la!ing a more im*ortant role in

the econom! )hile the go-ernment has #egun to )ithra) form certainacti-ities. Thus& the mar+et mechanism is gaining im*ortance. , similar

change is ha**ening all o-er the )orl& incluing in China. But there are

economies such as M!anmar an Cu#a )here the go-ernment still *la!s

an o-er)helming *art in sol-ing the resource allocation *ro#lem.

0ssentiall!& the mar+et is su**ose to guie resources to their most

efficient use. or eam*le if the salaries earne #! MB, egree holers

continue to rise& there )ill #e more an more stuents )anting to

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earn the egree an more an more institutes )anting to *ro-ie such

egrees to ta+e a-antage of this o**ortunit!. The go-ernment ma! not

force this to ha**en& it )ill ha**en on its o)n through the mar+et

mechanism. The go-ernment& if an!thing& coul *ro-ie a regulator!

function to ensure 2ualit! an consumer *rotection.

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2! Given % (i$ms dem%nd (un#tion. / 2 - 0! %nd the %ve$%ge

#ost (un#tion. A3 24 5 6 78 6 7. #%l#ul%te the level o(

output 'hi#h %: m%+imi;es tot%l $evenue

&: m%+imi;es p$o(its

Solution, 'ill uplo%d soon


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=;?4>> 5 ::;:A 5 :A;=4>

@>>;?>> 5 @; 5 :44;=4>

But =;@ D ::;:A D @; & or9

:A>;=4> D :A;=4> D :44;=4>

,8 irm is not using o*timal com#ination of in*uts.

B8 To mo-e com#ination to)ar e2uili#rium an assuming )hat )ages

are fie #! mar+et )e nee to #alance marginal *roucts of )or+ers.

MP of manual )or+ers might sta! the same 7no changes in )or+ers

re2uire8

MP of technicians shoul #e ecrease 7more )or+ers re2uire8

MP of su*er-isors shoul #e increase 7less )or+ers re2uire8

Though changes actuall! e*ens on a-aila#le #uget& mar+et eman&

*lanne;e*ecte out*ut re-enues& etc. 7man! ifferent assum*tions8.

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! =oes /$i#e =is#$imin%tion e+ist in the $e%l 'o$ld> =is#uss 'ith

$e(e$en#e to %ny p%$ti#ul%$ p$odu#t o$ se$vi#e!

Solution ,Price iscrimination or !iel management occurs )hen a firm

charges a ifferent *rice to ifferent grou*s of consumers for an ientical

goo or ser-ice& for reasons not associate )ith costs.

It is im*ortant to stress that charging ifferent *rices for similar goos is

not *ure *rice iscrimination.


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*remium *rice #ecause of actual or *ercei-e ifferences in the 2ualit! ;

*erformance of a goo or ser-ice.

Conitions necessar! for *rice iscrimination to )or+. 0ssentiall! there

are t)o main conitions re2uire for iscriminator! *ricing

: %ifferences in *rice elasticit! of eman #et)een mar+ets9 There must

#e a ifferent *rice elasticit! of eman from each grou* of consumers.

The firm is then a#le to charge a higher *rice to the grou* )ith a more

*rice inelastic eman an a relati-el! lo)er *rice to the grou* )ith a

more elastic eman. B! ao*ting such a strateg!& the firm can increase

its total re-enue an *rofits 7i.e. achie-e a higher le-el of *roucer

sur*lus8. To *rofit maimise& the firm )ill see+ to set marginal re-enue 5

to marginal cost in each se*arate 7segmente8 mar+et.

= Barriers to *re-ent consumers s)itching from one su**lier to another9

The firm must #e a#le to *re-ent mar+et see*age$ or consumer

s)itching$ E efine as a *rocess )here#! consumers )ho ha-e

*urchase a goo or ser-ice at a lo)er *rice are a#le to re1sell it to thoseconsumers )ho )oul ha-e normall! *ai the e*ensi-e *rice. This can

#e one in a num#er of )a!s& E an is *ro#a#l! easier to achie-e )ith the

*ro-ision of a uni2ue ser-ice such as a haircut rather than )ith the

echange of tangi#le goos. See*age might #e *re-ente #! selling a

*rouct to consumers at uni2ue an ifferent *oints in time E for eam*le

)ith the use of time s*ecific airline tic+ets that cannot #e resol uneran! circumstances.

*+%mples o( p$i#e dis#$imin%tion

Price iscrimination is an etremel! common t!*e of *ricing strateg!

o*erate #! -irtuall! e-er! #usiness )ith some iscretionar! *ricing

*o)er. It is a classic *art of *rice com*etition #et)een firms see+ing a

mar+et a-antage or to *rotect an esta#lishe mar+et *osition.

7a8 Perfect Price %iscrimination E charging )hate-er the mar+et )ill #ear

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Sometimes +no)n as o*timal *ricing& )ith *erfect *rice iscrimination&

the firm se*arates the )hole mar+et into each ini-iual consumer an

charges them the *rice the! are )illing an a#le to *a!. If successful& the

firm can etract all consumer sur*lus that lies #eneath the eman cur-e

an turn it into etra *roucer re-enue 7or *roucer sur*lus8. This is

im*ossi#le to achie-e unless the firm +no)s e-er! consumer(s

*references an& as a result& is unli+el! to occur in the real )orl. The

transactions costs in-ol-e in fining out through mar+et research )hat

each #u!er is *re*are to *a! is the main #loc+ or #arrier to a #usinesses

engaging in this form of *rice iscrimination.

If the mono*olist is a#le to *erfectl! segment the mar+et& then the

a-erage re-enue cur-e effecti-el! #ecomes the marginal re-enue cur-e

for the firm. The mono*olist )ill continue to see etra units as long as the

etra re-enue ecees the marginal cost of *rouction.

The realit! is that& although o*timal *ricing can an oes ta+e *lace in the

real )orl& most su**liers an consumers *refer to )or+ )ith *rice listsan *rice menus from )hich trae can ta+e *lace rather than ha-ing to

negotiate a *rice for each unit of a *rouct #ought an sol.

Secon %egree Price %iscrimination

This t!*e of *rice iscrimination in-ol-es #usinesses selling off *ac+ages

of a *rouct eeme to #e sur*lus ca*acit! at lo)er *rices than the

*re-iousl! *u#lishe;a-ertise *rice.0am*les of this can often #e foun in the hotel an airline inustries

)here s*are rooms an seats are sol on a last minute stan#! #asis. In

these t!*es of inustr!& the fie costs of *rouction are high. ,t the

same time the marginal or -aria#le costs are small an *reicta#le. If

there are unsol airline tic+ets or hotel rooms& it is often in the #usinesses

#est interest to offloa an! s*are ca*acit! at a iscount *rices& al)a!s

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electricit! com*anies se*arate mar+ets #! time9 There are three rates for

tele*hone calls9 a a!time *ea+ rate& an an off *ea+ e-ening rate an a

chea*er )ee+en rate. 0lectricit! su**liers also offer chea*er off1*ea+

electricit! uring the night.

,t off1*ea+ times& there is *lent! of s*are ca*acit! an marginal costs of

*rouction are lo) 7the su**l! cur-e is elastic8 )hereas at *ea+ times

)hen eman is high& )e e*ect that short run su**l! #ecomes relati-el!

inelastic as the su**lier reaches ca*acit! constraints. , com#ination of

higher eman an rising costs forces u* the *rofit maimising *rice.

Thir %egree 7Multi1Mar+et8 Price %iscrimination

This is the most fre2uentl! foun form of *rice iscrimination an

in-ol-es charging ifferent *rices for the same *rouct in ifferent

segments of the mar+et. The +e! is that thir egree iscrimination is

lin+e irectl! to consumers( )illingness an a#ilit! to *a! for a goo or

ser-ice. It means that the *rices charge ma! #ear little or no relation tothe cost of *rouction.

The mar+et is usuall! se*arate in t)o )a!s9 #! time or #! geogra*h!.

or eam*le& e*orters ma! charge a higher *rice in o-erseas mar+ets if

eman is estimate to #e more inelastic than it is in home mar+ets.

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! ?$ite sho$t notes on the (ollo'ing ,-

%: M%$@et =em%nd S#hedule

&: /e%@ o%d /$i#ing

#: In#ome *l%sti#ity o( =em%nd

Solution, %: M%$@et =em%nd S#hedule

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In economics & a mar+et eman scheule is a ta#le that lists the 2uantit!

of a goo all consumers in a mar+et )ill #u! at e-er! ifferent *rice. ,

mar+et eman scheule for a *rouct inicates that there is an in-erse

relationshi* #et)een *rice an 2uantit! emane. The gra*hical

re*resentation of a eman scheule is calle a eman cur-e.The

eman cur-e is the gra*h e*icting the relationshi* #et)een the *rice of

a certain commoit!& an the amount of it that consumers are )illing an

a#le to *urchase at that gi-en *rice. It is a gra*hic re*resentation of a

eman scheule. The eman cur-e for all consumers together follo)s

from the eman cur-e of e-er! ini-iual consumer9 the ini-iual

emans at each *rice are ae together. %es*ite its name& it is not

al)a!s sho)n as a cur-e& #ut sometimes as a straight line& e*ening on

the com*leit! of the scenario.

%eman cur-es are use to estimate #eha-iors in com*etiti-e mar+ets&

an are often com#ine )ith su**l! cur-es to estimate the e2uili#rium

*rice 7the *rice at )hich sellers together are )illing to sell the sameamount as #u!ers together are )illing to #u!& also +no)n as mar+et

clearing *rice8 an the e2uili#rium 2uantit! 7the amount of that goo or

ser-ice that )ill #e *rouce an #ought )ithout sur*lus;ecess su**l! or

shortage;ecess eman8 of that mar+et. In a mono*olistic mar+et& the

eman cur-e facing the mono*olist is sim*l! the mar+et eman cur-e.

Characteristics,ccoring to con-ention& the eman cur-e is ra)n )ith *rice on the

-ertical ais an 2uantit! on the hori"ontal ais. The function actuall!

*lotte is the in-erse eman function.

The eman cur-e usuall! slo*es o)n)ars from left to rightH that is& it

has a negati-e association . The negati-e slo*e is often referre to as the

la) of eman & )hich means *eo*le )ill #u! more of a ser-ice&

*rouct& or resource as its *rice falls. The eman cur-e is relate to the

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marginal utilit!! cur-e& since the *rice one is )illing to *a! e*ens on

the utilit! . Jo)e-er& the eman irectl! e*ens on the income of an

ini-iual )hile the utilit! oes not. Thus it ma! change inirectl! ue to

change in eman for other commoities.

%eman scheule

, eman scheule is a ta#le that lists the 2uantit! of a goo a *erson

)ill #u! at each ifferent *rice. The eman cur-e is a gra*hical

e*iction of the relationshi* #et)een the *rice of a goo an the 2uantit!

of the goo that a consumer )oul eman uner certain time& *lace an

circumstances. The eman relationshi* can also #e e*resse

mathematicall!9 K 5 f7PH & Prg& Po*& 8 )here K is 2uantit! emane&

P is the *rice of the goo& Prg is the *rice of a relate goo& is income&

Po* is *o*ulation an is the e*ectation of some rele-ant future

-aria#le such as the future *rice of the *rouct. The semi1colon means

that the arguments to its right are hel constant )hen the relationshi* is

*lotte t)o1imensionall! in 7*rice& 2uantit!8 s*ace. If one of these other-aria#les changes the eman cur-e )ill shift. or eam*le& if the

*o*ulation increase then there )oul #e an out)ar 7right)ar8 shift of

the eman cur-e& since more consumers )oul mean higher eman.

This shift is referre to as a change in eman. Mo-ements along the

eman cur-e occur onl! )hen 2uantit! emane changes in res*onse

to a change in *rice.

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&: /e%@ o%d /$i#ing

Pea+1loa *ricing is a *ricing techni2ue a**lie to *u#lic goos. Instea

of ifferent emans for the same *u#lic goo& )e consier the emans

for a *u#lic goo in ifferent *erios of the a!& month or !ear& then

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fining the o*timal ca*acit! 72uantit! su**lie8 an& after)ars& the

o*timal *ea+1loa *rices.

This has *articular a**lications in *u#lic goos such as *u#lic ur#an

trans*ortation& )here a! eman 7*ea+ *erio8 is usuall! much higher

than night eman 7off1*ea+ *erio8. B! su#tracting the marginal costs of

o*eration from the original emans )e fin the marginal #enefits of

ca*acit!& )hich must then #e -erticall! aggregate an e2uate to the

marginal cost of increasing ca*acit!.

s an :>s.

Pea+1loa *ricing is often use #! electricit! an tele*hone utilities as a

means of reflecting the in-estment the! ha-e mae to meet *ea+ eman

for their ser-ices.

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#: In#ome *l%sti#ity o( =em%nd

Income elasticit! of eman measures the relationshi* #et)een a change

in 2uantit! emane an a change in income. The #asic formula for

calculating the coefficient of income elasticit! is9

Percentage change in 2uantit! emane of goo i-ie #! the

*ercentage change in real consumers6 income

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Inferior goos ha-e a negati-e income elasticit! of eman. %eman falls

as income rises. In a recession the eman for inferior *roucts might

actuall! gro) 7e*ening on the se-erit! of an! change in income an

also the a#solute co1efficient of income elasticit! of eman8. or

eam*le if )e fin that the income elasticit! of eman for cigarettes is

1>.@& then a Q fall in the a-erage real incomes of consumers might lea

to a :.Q fall in the total eman for cigarettes 7ceteris *ari#us8.


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