IMT – 20: MANAGERIAL ECONOMICS -MT2

PART – A

Q1. Distinguish between the principles of marginalism and incrementalism with the help of examples. 

Q2. How is the price elasticity of demand measured? Explain the relationship between price elasticity, average revenue and marginal revenue.

Q3. Critically examine the law of diminishing marginal utility.

Q4. Why is an indifference curve for two normal goods convex to origin? Why cannot it be a concave curve or a straight line?

Q5. Why is demand forecasting important? Explain the various types of survey methods of forecasting demand and their usefulness. 

PART – B

Q1. Diagramatically explain the three stages of the law of diminishing marginal returns. 

Q2. What are isoquants and isocost lines? Explain graphically

Q3. Distinguish between implicit cost and explicit cost with the help of example.

Q4. Graphically explain the relationship between change in output and AVC, AC and MC.

Q5. Describe the long run average cost (LAC) curve according to the modern cost theory. 

PART – C

Q1. Explain the Cyert-March Hypothesis of satisficing behavior.

Q2. Explain the profit maximizing conditions of a firm with the help of marginal revenue and marginal cost.

Q3. Explain why does a perfectly competitive firm reaps normal profits in the long run.

Q4. What is price discrimination? How does a discriminating monopolist allocate his output in different markets to charge different price.

Q5. Explain how price is determined under oligopoly under conditions of price leadership.

CASE STUDY – I

 Estimation of the Demand for Oranges by Market Experiment

Researchers at the University of Florida conducted a market experiment in Grand Rapids, Michigan, to determine the price elasticity and the cross-price elasticity of demand for three types of Valencia oranges: those from the Indian River district of Florida, those from the interior district of Florida, and those from California. Grand Rapids was chosen as the site for the market experiment because its size, demographic characteristics, and economic base were representative of other midwestern markets for oranges.

Nine supermarkets participated in the experiment, which involved changing the price of the three types of oranges, each day, for 31 consecutive days and recording the quantity sold of each variety. The price changes ranged within ±16 cents in 4-cent increments, around the price of oranges that prevailed in the market at the time of the study. More than 9,250 dozen oranges were sold in the nine supermarkets during the 31 days of the experiment. Each of the participatin supermarkets was provided with an adequate supply of each type of orange so that supply effects could be ignored. The length of the experiment was also sufficiently short so as to ensure no change in tastes, incomes, population, the rate of inflation, and determinants of demand other than price.

The results, summarized in the following table indicate that the price elasticity of demand for all three types of oranges was fairly high (the boldface numbers in the main diagonal of the table). For example, the price elasticity of demand for the Indian River oranges of -3.07 indicates that a 1 percent increase in their price leads to a 3.07 percent decline in their quantity demanded. More interestingly, the off-diagonal entries in the table, show that while the crossprice elasticities of demand between the two types of Florida oranges were larger than 1, they were close to zero with respect to the California oranges. In other words, while consumers regarded the two types of Florida oranges as close substitutes, they did not view the California oranges as such. In pricing their oranges, therefore, producers of each of the two Florida varieties would have to carefully consider the price of the other (as consumers switch readily among them as a result of price changes) but need not be much concerned about the price of California oranges.

Questions

(a) In light of the case define a test market? When should a firm take help of market experiments to forecast demand?

(b) Suggest a suitable price policy for the three types of oranges.

CASE STUDY – II

A deodorant company manufactures and sells several types of deodorants which are branded as ‘Smell Fresh’. The company introduced five years ago, a new type of deodorant and its sales increased rapidly. However, over the past two years, sales have been declining steadily even though the market for deodorants has been expanding. Worried by the declining sales the company conducted a survey of the market, which yielded the following information:

(i) Several new rivals have come up during the past five years, which manufacture and sell almost similar deodorants.

(ii) Other companies have set prices lower than the prices of this company.

(iii) This company had initially set the price of its new brand at Rs 40, for which retailer pays Rs 30, which was never changed.

(iv) The rival firms have set their prices at Rs 37.50, retailers paying Rs 25.

In view of these facts, the company decided to review the cost structure to find out whether the margin to the retailers could be reduced to the level of the rival firms. The company finds that the variable costs (including raw materials and labour) stands at Rs 15 per deodorant. At present the company sells 4, 00,000 deodorants. As to the market prospects, if the price is reduced to Rs 35, the demand would increase by 1,50,000 and if the price is reduced to Rs. 32.50, demand would increase to 6,50,000 units. With such an increase in production, the firm could use its resources more fully. The bulk of purchase of raw materials and more efficient use of labour would both help to reduce the unit variable cost to Rs. 12.50.

Questions

(i) What price should the company charge to recapture market lost to rival firms?

(ii) Suggest alternative strategies that the company can adopt to counteract competition.