Managerial Economics

1. ASSIGNMENT
DRIVE SPRING 2015
PROGRAM MBA/ MBADS/ MBAFLEX/ MBAHCSN3/ PGDBAN2
SEMESTER 1
SUBJECT CODE & NAME MB0042- MANAGERIAL ECONOMICS
BK ID B1625
Q.No 1.What is production function and its uses? Explain the two types of production
functions.
Ans. Production Function
Production function expresses the relationship between inputs and outputs. Production function is an
equation, a table, a graph, which express the relationship between inputs and outputs. Production
function explains that the maximum output of goods or services that can be produced by a firm in a
specific time with a given amount of inputs or factors of production.
Production Function: Q = f (K, L)
We are producing Q quantities of goods by employing K capital and L labor.
Here
Q Represents quantity of goods
K Represents Capital employed
L Represents Labor employed
Significance / Importance of Production Function :
1. Production function shows the maximum output that can be produced by a specific set of combination
of input factors.
2. The production function explains how a firm reaches the most optimum combination of factors so that
the unit costs are the lowest.
3. Production function explains how a producer combines various inputs in order to produce a given
output in an economically efficient manner.
4. The production function helps us to estimate the quantity in which the various factors of production
are combined.
Types of Production function
1. Short-Term production function
Short-Term production function is a function, which we are producing goods in the short-term by
employing two inputs that are :
Capital (K) : It is fixed input which is constant in the short-term.

2. Labor (L) : It is variable input in the short-term.
· In the short-term we are producing only one product by employing two inputs
· The two inputs are K capital and L is labor.
· In the short term we will increase L input and we will keep K as constant.
2. The Long-Run Production Function :
In the long run, a firm has time enough to change the amount of all of its inputs. Thus, there is
really no difference between fixed and variable inputs. Table 7.5 uses the data first presented in Table 7.1
and illustrates what happens total output as the data first presented in Table 7.1 and illustrates what
happens to total output as both inputs X and Y increase one unit at a time. The resulting increase in the
total output as the two inputs increase is called returns to scale.
Q.No 2. Consumers' interview method is a survey method used for estimating the demand
for new products. This method is very important with regard to collect the relevant
information directly from the consumers with regard to their future purchase plans.
Opinion surveys and direct interview method are the two important techniques among all.
Describe these two methods in detail.
Ans. Consumer’s Survey Method or Survey of Buyer’s Intentions:
In this method, the consumers are directly approached to disclose their future purchase plans. I his is
done by interviewing all consumers or a selected group of consumers out of the relevant population. This
is the direct method of estimating demand in the short run. Here the burden of forecasting is shifted to
the buyer. The firm may go in for complete enumeration or for sample surveys. If the commodity under
consideration is an intermediate product then the industries using it as an end product are surveyed.
A) Sample Survey and Test Marketing:
Under this method some representative households are selected on random basis as samples and their
opinion is taken as the generalised opinion. This method is based on the basic assumption that the sample
truly represents the population. If the sample is the true representative, there is likely to be no significant
difference in the results obtained by the survey. Apart from that, this method is less tedious and less
costly.
A variant of sample survey technique is test marketing. Product testing essentially involves placing the
product with a number of users for a set period. Their reactions to the product are noted after a period of
time and an estimate of likely demand is made from the result. These are suitable for new products or for
radically modified old products for which no prior data exists. It is a more scientific method of estimating
likely demand because it stimulates a national launch in a closely defined geographical area.
B) Direct Interview Method
Under this Survey, the firm has to go for a door to door survey for the forecast period by contacting all the
households in the area. This method has an advantage of first hand, unbiased information, yet it has its
share of disadvantages also. The major limitation of this method is that it requires lot of resources,
manpower and time.

3. In this method, consumers may be reluctant to reveal their purchase plans due to personal privacy or
commercial secrecy. Moreover, at times the consumers may not express their opinion properly or may
deliberately misguide the investigators.
Q.No 3. A cost-schedule is a statement of variations in costs resulting from variations in the
levels of Output and it shows the response of costs to changes in output. If we represent the
relationship between changes in the level of output and costs of production, we get different
types of cost curves in the short run. Define the kinds of cost concepts like TFC, TVC, TC,
AFC, AVC, AC and MC and its corresponding curves with suitable diagrams for each.
Ans. Total fixed cost (TFC) r.t total money expenses incurred on FF as plant, machinery etc in short run. It
corresponds to FF in short run PF.It remains the same at all levels of output in short run. It is the same
even when output is nil. It tells that whatever may be TP, whether 1 to 6 units,it remains constant.
Total Variable Cost (TVC) r.t total money expenses incurred on VFI as raw materials, power, fuel, water,
transport & communication, etc, in short run.It corresponds to VFI in short run PF. It is got by summing
up the quantities of VFI multiplied by their prices. Its formula is as follows.
TVC = TC - TFC. TVC = f (Q)
Total cost (TC) :It r.t aggregate money expenditure incurred by a firm to make given quantity of output. It
is measured in relation to PF by multiplying factor quantities with their prices.
TC = f (Q) which means that it varies with output. Theoretically ,it has all kinds of money costs(explicit &
implicit). Normal profit is included in TC as it is an implicit cost. It includes FC &VC.So,
TC = TFC +TVC.

4. Average fixed cost (AFC) :It is FC/ unit of output. When TFC is divided by total units of output, AFC is got
TC = TFC + TVC
Average variable cost (AVC) :It is VC/r unit of output. It can be computed by dividing TVC by total units of
output.
So AVC = TVC/Q.
Average total cost (ATC) or average cost (AC) or unit cost: It r.t cost / unit of output.It is the cost / unit of
output made.It is the sum of AFC & AVC.It is got by dividing TC by total output made. AC = TC/Q. Also, AC
is sum of AFC & AVC.

5. Marginal cost (MC):It be defined as the net addition to the TC as 1 more unit of output is made.Here
additional cost is incurred to make additional unit. E.g, if it costs Rs. 100 to make 50 units & Rs. 105 to
make 51 units, then it would be Rs. 5. It is got calculating the change in TC due to change in TP.
Q.No 4 Inflation is a global Phenomenon which is associated with high price causes decline
in the value for money. It exists when the amount of money in the country is in excess of the
physical volume of goods and services. Explain the reasons for this monetary phenomenon.
Ans. Inflation is a global Phenomenon which is associated with high price causes decline in the value for
money. It exists when the amount of money in the country is in excess of the physical volume of goods
and services. Explain the reasons for this monetary phenomenon. Inflation is commonly understood as a
situation of substantial and rapid increase in the level of prices and consequent deterioration in the value
of money over a period of time. It refers to the average rise in the general level of prices and fall in the
value of money. Inflation is statistically measured in terms of percentage increase in the price index, as a
rate per unit of time-usually a year or a month. Wholesale price index number is used to measure
inflation, consumer price index or the cost of living index is also used to measure the same.
Percentage rate of inflation, for example I am newly appointed department manager. My department
has not been performing well, and I have been investigating why. I soon realize that the firm has had no
formal performance appraisal system. Supervisors that need to do a better job have not been receiving
any kind of formal feedback.
To correct this situation, I will begin by creating a performance grading form that will be used to assess
the front-line supervisor’s performance. Create a form that includes areas the supervisors should be
graded on and the relative weight or importance assigned to each category. For example, should 30% of
the weight be assigned to communication skills versus 20% for coaching skills?
Creating the form including the relative weights of each category and the grading scale to use (for
example, for grading criteria you could use 1–9; low, mid, or high; or poor, mediocre, average, or
excellent).

6. Q.No 5 Discuss the practical application of Price elasticity and Income elasticity
of demand.
Ans. Price Elasticity of Demand
A. The law of demand tells us that consumers will respond to a price decrease by buying more of a
product (other things remaining constant), but it does not tell us how much more.
B. The degree of responsiveness or sensitivity of consumers to a change in price is measured by the
concept of price elasticity of demand.
1. If consumers are relatively responsive to price changes, demand is said to be elastic.
2. If consumers are relatively unresponsive to price changes, demand is said to be inelastic.
3. Note that with both elastic and inelastic demand, consumers behave according to the law of
demand; that is, they are responsive to price changes. The terms elastic or inelastic describe the degree of
responsiveness. A precise definition of what we mean by “responsive” or “unresponsive” follows.
Price elasticity formula
Quantitative measure of elasticity, Ed = percentage change in quantity/percentage change in price.
Income elasticity of demand:
Income elasticity of demand refers to the percentage change in quantity demanded that results from
some percentage change in consumer incomes.
Ei = (percentage change in quantity demanded)/(percentage change in income)
1. A positive income elasticity indicates a normal or superior good.
2. A negative income elasticity indicates an inferior good.
3. Those industries that are income elastic will expand at a higher rate as the economy grows.
Q.No 6 Define revenue. Explain the types of revenue and the relationship between TR, AR
and MR with an example of a hypothetical revenue schedule.
Ans. The amount of money that a company actually receives during a specific period, including discounts
and deductions for returned merchandise. It is the "top line" or "gross income" figure from which costs
are subtracted to determine net income.
There are three types which have to be explained one by one:
i. Total Revenue (TR)
ii. Average Revenue (AR)
iii. Marginal Revenue (MR)
Total Revenue: Total Revenue refers to the total amount of money received by the firm during specific
periods. It is derived by multiplying the number of units sold by the price per unit. Therefore Revenue in
general refers to Total Revenue. It is denoted as TR.

7. Formula for calculation of TR is;-
TR = P x Q
Where TR is total revenue of the firm during a specific period
P is price per unit of the output
Q is quantity sold.
Example: A firm has sold 5 dozens of pens. The cost per pen was Rs. 20. The total revenue of the firm is:
TR = p x q
= 20 x 60
= Rs. 1200
Average Revenue: - Average Revenue is the revenue generated per unit of output sold. It can also be
defined as total revenue per unit of output sold.
The average revenue received by a firm is Total Revenue divided by quantity. It is expressed as:-
AR=TR
q
Where AR = Average Revenue
TR= Total Revenue
q = Quantity sold
I.e. Total Revenue= Average Revenue (P) × quantity (q) Example:-
Unit/quantity Total Revenue Average Revenue
2 20 10
4 40 10
5 60 12
6 90 15
Marginal Revenue: - Marginal Revenue is the increase in revenue from selling one additional unit of
output. It is also called as revenue obtained from the last unit sold. It is calculated by taking the difference
between Total Revenue before and after an increase in the rate of production.
Marginal Revenue can also be depicted as change in Total Revenue/Change in quantity
Example: In a firm sells 10 object @ Rs.20 each and further it sells 11 object @ Rs. 19 each, then
the marginal revenue from the 11th
object is -
(10× 20) - (11×19) = Rs. 9

8. MR = Change in Total Revenue
----------------------------------
Change in Quantity
MR = ∆TR
∆Q
Relationship Between Average and Marginal Revenue
No. Of Units TR (1) AR (2) MR (3)
1 10 10 10
2 18 9 8
3 24 8 6
4 28 7 4
5 30 6 2
6 28 4.6 -2.6
7 21 3 -7
Diagram -1
Relation between Average Revenue (AR) and Marginal Revenue (MR)