MB0042 – Managerial Economics



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Summer 2013

Master of Business Administration- MBA Semester 1
MB0042 – Managerial Economics - 4 Credits
(Book ID: B 1625) Assignment (60 marks)
Note: Answer all questions. Kindly note that answers for 10 marks questions should be approximately of 400 words. Each question is followed by evaluation scheme.

Q1. Discuss the practical application of Price elasticity and Income elasticity of demand.
Answer : Price elasticity of demand :
Price elasticity of demand (PED or Ed) is a measure used in economics to show the responsiveness, or elasticity, of the quantity demanded of a good or service to a change in its price. More precisely, it gives the percentage change in quantity demanded in response to a one percent change in price (ceteris paribus, i.e. holding constant all the other determinants of demand, such as income). It was devised by Alfred Marshall.
 Applications of price elasticity :
1.Inelastic demand for agricultural products helps to explain why bumper crops depress the prices and total revenues for farmers.
2.Governments look at elasticity of demand when levying excise taxes.  Excise taxes on products with inelastic demand will raise the most revenue and have the least impact on quantity demanded for those products.

Q2. Explain the profit maximisation model in detail.
Answer :   Main propositions of the profit-maximization model :
The model is based on the assumption that each firm seeks to maximize its profit given certain technical and market constraints. The following are the main propositions of the model.
·         A firm is a producing unit and as such it converts various inputs into outputs of higher value under a given technique of production.
·         The basic objective of each firm is to earn maximum profit.
·         A firm operates under a given market condition.
·         A firm will select that alternative course of action which helps to maximize consistent profits
·         A firm makes an attempt to change its prices, input and output quantity to maximize its profit.
Explanation of model :

Q3. Describe the objectives of pricing Policies.
Answer : The following objectives are to be considered while fixing the prices of the product.
1. Profit maximization in the short term :
The primary objective of the firm is to maximize its profits. Pricing policy as an instrument to achieve this objective should be formulated in such a way as to maximize the sales revenue and profit. Maximum profit refers to the highest possible of profit. In the short run, a firm not only should be able to recover its total costs, but also should get excess revenue over costs. This will build the morale of the firm and instill the spirit of confidence in its operations.
2. Profit optimization in the long run :
The traditional profit maximization hypothesis may not prove beneficial in the long run. With the sole motive of profit making a firm may resort to several kinds of unethical practices like charging exorbitant prices, follow Monopoly Trade Practices (MTP)
Q4. Define Fiscal Policy and the instruments of Fiscal policy.
Answer : Fiscal policy :
In economics and political science, fiscal policy is the use of government revenue collection (taxation) and expenditure (spending) to influence the economy. In economics, fiscal policy is the use of government expenditure and revenue collection (taxation) to influence the economy. Fiscal policy can be contrasted with the other main type of macroeconomic policy, monetary policy, which attempts to stabilize the economy by controlling interest rates and the money supply.
  • Aggregate demand and the level of economic activity;
  • The distribution of income;
                                                                                                                                                                     
Q5. Explain the kinds and the basis of Price discrimination under monopoly.
Answer : Kinds of price discrimination :
(1)First degree price discrimination :
This type of price discrimination requires the monopoly seller of a good or service to know the absolute maximum price (or reservation price) that every consumer is willing to pay. By knowing the reservation price, the seller is able to absorb the entire consumer's surplus from the consumer and transform it into revenues.
(2)Second degree price discrimination :
In second degree price discrimination, price varies according to quantity demanded. Larger quantities are available at a lower unit price. This is particularly widespread in sales to industrial customers, where bulk buyers enjoy higher discounts. Additionally to second degree price discrimination, sellers are not able to differentiate between different types of consumers.

Q6. Define the term Business Cycle and also explain the phases of business or
trade cycle in brief.
Answer : Business cycle :
The term business cycle (or economic cycle) refers to economy-wide fluctuations in production, trade and economic activity in general over several months or years in an economy organized on free-enterprise principles. The business cycle is the upward and downward movements of levels of GDP (gross domestic product) and refers to the period of expansions and contractions in the level of economic activities (business fluctuations) around its long-term growth trend.
These fluctuations occur around a long-term growth trend, and typically involve shifts over time between periods of relatively rapid economic
Phases of business cycle :
1. Prosperity Phase :
When there is an expansion of output, income, employment, prices and profits, there is also a rise in the standard of living. This period is termed as Prosperity phase.



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