E. G.S.

PILLAY ARTS & SCIENCE COLLEGE (AUTONOMUS)

NAGAPATTINAM – 611 002
(Accredited by NAAC With “A” Grade)
(MBA – Approved by AICTE, New Delhi)
(Affiliated to Bharathidasan University, Tiruchirappalli – 24)

Section A (10X2=20)
1. Define Managerial Economics.
2. What is Capital Budgeting?
3. What is Production Function?
4. What is Isoquant?
5. Mention any two features of perfect competition.
6. What is price discrimination?
7. What is Break even analysis?
8. State the condition of profit maximization.
9. What is business cycle?
10. What do you mean by inflation?

Section B (5X5=25)
11. A) Explain the nature and scope of managerial economies.
(OR)
B) Explain the types demand forecasting.
12. A) Explain the Cost – Output relation in the short run.
(OR)
B) Explain the concept Isoquant.
13. A) What are the features of perfect competition.
(OR)
B) Explain Kinked demand curve under oligopoly.
14. A) What are the functions of profit.
(OR)
B) Explain the profit policy and budget.
15. A) What are the characteristics of business cycle?
(OR)
B) What are the objectives of monetary policy?
Section C (3X10=30)
 16. Discuss the demand determinants.
17. Describe the external and internal diseconomies of scale.
18. How is price – output determined under monopolistic competition.
19. Discuss the theory of profit maximisation.
20. Discuss the types and causes of inflation.

ANSWER KEY
SECTION A

1. Prof. Evan J. Douglas defines, “Managerial economics is concerned with the application

of economic principles and methodologies to the decision-making process within the firm
or organization under the conditions of uncertainty.”

2. Capital budgeting is the process of determining which long-term capital investments are worth
spending a company's money on based on their potential to profit the business in the long-term.

3. Production function is the relationship between inputs of productive services per unit of
time and outputs of product per unit of time.

4. Isoquant shows the different combinations of two inputs that a firm can use to produce a
specific quantity of output.

5. Large number of buyers and Sellers.

Homogeneous Product.

6. Price discrimination is a selling strategy that charges customers different prices for the
same product or service based on what the seller thinks they can get the customer to agree
to. In pure price discrimination, the seller charges each customer the maximum price he
or she will pay. 

7. Break-even analysis is of vital importance in determining the practical application of cost

functions. It is a function of three factors, i.e. sales volume, cost and profit. It aims at
classifying the dynamic relationship existing between total cost and sale volume of a
company.

8. TR = TC, profit is maximum.

Profit = TR - TC
MR = MC, at point E GIVES maximum profit.

9. A business cycle is a cycle of fluctuations in the Gross Domestic Product (GDP) around

its long-term natural growth rate. It explains the expansion and contraction in economic
activity that an economy experiences over time.

10. Inflation is the decline of purchasing power of a given currency over time. A quantitative
estimate of the rate at which the decline in purchasing power occurs can be reflected in
the increase of an average price level of a basket of selected goods and services in an
economy over some period of time.

SECTION B
 11. A) Nature of Managerial Economics
 Art and Science
 Micro Economics
 Uses Macro Economics
 Multi-disciplinary
 Prescriptive / Normative Discipline
 Management Oriented
 Pragmatic

Scope of Managerial Economics:

The scope of managerial economics includes following issues:
 Theory of Demand
 Theory of Production
 Theory of Exchange or Price Theory
 Theory of Profit
 Theory of Capital and Investment

B) Types of Forecasting
There are two types of forecasting:
 Based on Economy
Macro-level forecasting
Industry level forecasting
Firm-level forecasting
 Based on the time period
Short-term forecasting
Long-term forecasting

12) A) Cost-Output Relationship in the Short-Run

The cost concepts made use of in the cost behavior are Total cost, Average cost, and Marginal
cost.

 TC=TFC+TVC
 AC=TC/Q

the relationship between ‘AVC’, ‘AFC’ and ‘ATC’ can be summarized up as follows:
1. If both ‘AFC’ and ‘AVC’ fall, ‘ATC’ will also fall.
2. When ‘AFC’ falls and ‘AVC’ rises
3. ATC’ will fall where the drop in ‘AFC’ is more than the raise in ‘AVC’.
4. ‘ATC’ remains constant is the drop in ‘AFC’ = rise in ‘AVC’
5. ‘ATC’ will rise where the drop in ‘AFC’ is less than the rise in ‘AVC’

Short run curve:

b) Concept of Isoquant:
An isoquant shows various combinations of two factors that will enable a producer to produce a
same level of output. In other words, each point of an isoquant will represent a technology and as
we move from one point to another on an isoquant we switch across technologies.

An isoquant, therefore, depicts all the technological possibilities graphically and show a
substitution between two factors while keeping the output same.

13) A) Features of Perfect competition:

1. Large number of buyers and Sellers.

2. Homogeneous Product.
3. Free entry and exit conditions.
4. Perfect knowledge on the part of buyers and sellers.
5. Perfect mobility of factors of production.
6. Absence of transport cost.
7. Absence of Government or artificial restrictions.

B) A kinked demand curve

A kinked demand curve occurs when the demand curve is not a straight line but has a different
elasticity for higher and lower prices.
This model of oligopoly suggests that prices are rigid and that firms will face different effects for
both increasing price or decreasing price. The kink in the demand curve occurs because rival
firms will behave differently to price cuts and price increases.
14) A) Functions of Profit:
 Measure of performance
 Premium to cover costs of staying in business
 Ensuring supply of future capital
B) Profit Policies:
It is generally held that the main motive of a firm is to make profits. The volume of profit made
by it is regarded as a primary measure of its success.
 Industry Leadership
 Restricting the Entry
 Political Impact
 Consumer Goodwill
 Wage Consideration
 Liquidity Preference
 Avoid Risk
BUDGET:
The budget is described as a precise statement, representing a financial estimate of income and
expenditure of the government for a certain period. In cost accounting, budget means a
quantitative statement, prepared before a particular period to serve as an estimate of future
receipts and disbursements.

15) A) Features of business cycle:

1. Business cycle occurs Periodically
2. It is all embracing.
3. Business Cycle is wave-like
4. Process of Business Cycle is cumulative and self-reinforcing
5. The cycles will be similar but not identical

B) Objectives of monetary policy:

1. Stabilising the Business Cycle

2. Reasonable Price Stability
3. Faster Economic Growth
4. Exchange Rate Stability

SECTION C
16) The Five Determinants of Demand

The five determinants of demand are:

1. The price of the good or service.

2. The income of buyers.
3. The prices of related goods or services—either complementary and purchased along with
a particular item, or substitutes and bought instead of a product. 
4. The tastes or preferences of consumers will drive demand.
5. Consumer expectations. Most often, this refers to whether a consumer believes prices for
the product will rise or fall in the future.

17) Diseconomies of Scale of Production: Internal and External

1. Internal Diseconomies:
(a) Inefficient Management
(b) Technical Difficulties
(c) Production Diseconomies
(d) Marketing Diseconomies
(e) Financial Diseconomies
(d) Marketing Diseconomies
(e) Financial Diseconomies
2. External Diseconomies
(a). Diseconomies of Pollution
(b). Diseconomies of Strains on Infrastructure
(c). Diseconomies of High Factor Prices

18) Price-Output Equilibrium under Monopolistic Competition

Equilibrium in Short-Run and Long Run
Equilibrium in Short Run
Equilibrium in Long Run

In the present case average cost is equal to average revenue that is MP. Therefore, in long run,
the profit is normal. In the short run, equilibrium is attained when marginal revenue is equal to
marginal cost. However, in the long run, both the conditions (MR=MC and AR=AC) must hold
to attain equilibrium.

19) Profit maximization theory:

(i) MC = MR and

(ii) MC curve cuts the MR curve

Maximum profits refer to pure profits which are a surplus above the average cost of production.

It is the amount left with the entrepreneur after he has made payments to all factors of

production, including his wages of management. In other words, it is a residual income over and

above his normal profits.

The profit maximization condition of the firm can be expressed as:

Maximise π (Q)
Where π (Q)=R (Q)-C (Q)
Where π (Q) is profit, R (Q) is revenue, C (Q) are costs, and Q are the units of output sold.
The two marginal rules and the profit maximisation condition stated above are applicable both to
a perfectly competitive firm and to a monopoly firm.
20. Causes of Inflation
Inflation means there is a sustained increase in the price level. The main causes of inflation are
either excess aggregate demand (AD) (economic growth too fast) or cost push factors (supply-
side factors).

1. Demand-pull inflation – aggregate demand growing faster than aggregate supply (growth
too rapid)
2. Cost-push inflation – For example, higher oil prices feeding through into higher costs.
3. Devaluation – increasing cost of imported goods, and also the boost to domestic demand.
4. Rising wages – higher wages increase firms costs and increase consumers’ disposable
income to spend more.
5. Expectations of inflation – causes workers to demand wage increases and firms to push
up prices.

Types of inflation:

Demand-Pull Inflation – Demand-pull Inflation emerges when the total demand for goods and
supply is higher than the capacity of production in the market.
Cost-Push Inflation – Sudden shortfall of supply leads to a surge in the cost of production,
which increases the rate of Inflation.
Built-in Inflation – When the cost of wages of the workers increases, to keep up with their
demand, the firm increases the cost of production, which leads to the rise in the cost of goods.