Examination Paper Semester I: Managerial Economics
IIBM Institute of Business Management
IIBM Institute
of Business Management
Semester-1
Examination Paper MM.100
Managerial
Economics
Section A:
Objective Type (30 marks)
· This section
consists of multiple choices & Short notes type questions.
· Answer all the
questions.
· Part one carries
1 mark each & Part two carries 5 marks each.
Part one:
Multiple
choices:
1. It is a study of economy as a
whole
a. Macroeconomics
b. Microeconomics
c. Recession
d. Inflation
2. A comprehensive formulation
which specifies the factors that influence the demand for the
product
a. Market demand
b. Demand schedule
c. Demand function
d. Income effect
3. It is computed when the data
is discrete and therefore incremental changes is measurable
a. Substitution effect
b. Arc elasticity
c. Point elasticity
d. Derived demand
4. Goods & services used for
final consumption is called
a. Demand
b. Consumer goods
c. Producer goods
d. Perishable goods
5. The curve at which
satisfaction is equal at each point
a. Marginal utility
b. Cardinal measure of utility
c. The Indifference Curve
d. Budget line
Examination Paper Semester I: Managerial Economics
IIBM Institute of Business Management
6. Costs that are reasonably
expected to be incurred in some future period or periods
a. Future costs
b. Past costs
c. Incremental costs
d. Sunk costs
7. Condition when the firm has no
tendency either to increase or to contract its output
a. Monopoly
b. Profit
c. Equilibrium
d. Market
8. Total market value of all
finished goods & services produced in a year by a country’s residents is
known as
a. National income
b. Gross national product
c. Gross domestic product
d. Real GDP
9. The sum of net value of goods
& services produced at market prices
a. Government expenditure
b. Product approach
c. Income approach
d. Expenditure approach
10. The market value of all the
final goods & services made within the borders of a nation in an year
a. Globalization
b. Subsidies
c. GDP
d. GNP
Part Two:
1. Define ‘Arc Elasticity’.
2. Explain the law of ‘Diminishing
marginal returns’.
3. What is ‘Prisoner’s Dilemma’,
of non cooperative game?
4. What is ‘Third degree
Discrimation’?
END OF SECTION A
Examination Paper Semester I: Managerial Economics
IIBM Institute of Business Management
Section B: Case
lets (40 marks)
· This section
consists of Case lets.
· Answer all the
questions.
· Each Case let
carries 20 marks.
· Detailed
information should form the part of your answer (Word limit 150 to 200 words).
Case let 1
The war on drugs is an expensive
battle, as a great deal of resources go into catching those who buy or
sell illegal drugs on the black
market, prosecuting them in court, and housing them in jail. These costs
seem particularly exorbitant when
dealing with the drug marijuana, as it is widely used, and is likely no
more harmful than currently legal
drugs such as tobacco and alcohol. There's another cost to the war on
drugs, however, which is the
revenue lost by governments who cannot collect taxes on illegal drugs. In a
recent study for the Fraser
Institute, Canada, Economist Stephen T. Easton attempted to calculate how
much tax revenue the government
of the country could gain by legalizing marijuana. The study estimates
that the average price of 0.5
grams (a unit) of marijuana sold for $8.60 on the street, while its cost of
production was only $1.70. In a
free market, a $6.90 profit for a unit of marijuana would not last for long.
Entrepreneurs noticing the great
profits to be made in the marijuana market would start their own grow
operations, increasing the supply
of marijuana on the street, which would cause the street price of the
drug to fall to a level much
closer to the cost of production. Of course, this doesn't happen because the
product is illegal; the prospect
of jail time deters many entrepreneurs and the occasional drug bust ensures
that the supply stays relatively
low. We can consider much of this $6.90 per unit of marijuana profit a
risk-premium for participating in
the underground economy. Unfortunately, this risk premium is making a
lot of criminals, many of whom
have ties to organized crime, very wealthy. Stephen T. Easton argues that
if marijuana was legalized, we
could transfer these excess profits caused by the risk premium from these
grow operations to the
government: If we substitute a tax on marijuana cigarettes equal to the
difference
between the local production cost
and the street price people currently pay – that is, transfer the revenue
from the current producers and
marketers (many of whom work with organized crime) to the government,
leaving all other marketing and
transportation issues aside we would have revenue of (say) $7 per [unit].
If you could collect on every
cigarette and ignore the transportation, marketing, and advertising costs, this
comes to over $2 billion on
Canadian sales and substantially more from an export tax, and you forego the
costs of enforcement and deploy
your policing assets elsewhere. One interesting thing to note from such a
scheme is that the street price
of marijuana stays exactly the same, so the quantity demanded should
remain the same as the price is
unchanged. However, it's quite likely that the demand for marijuana would
change from legalization. We saw
that there was a risk in selling marijuana, but since drug laws often
target both the buyer and the
seller, there is also a risk (albeit smaller) to the consumer interested in
buying marijuana. Legalization
would eliminate this risk, causing the demand to rise. This is a mixed bag
from a public policy standpoint:
Increased marijuana use can have ill effects on the health of the
population but the increased
sales bring in more revenue for the government. However, if legalized,
governments can control how much
marijuana is consumed by increasing or decreasing the taxes on the
product. There is a limit to
this, however, as setting taxes too high will cause marijuana growers to sell
on
the black market to avoid
excessive taxation. When considering legalizing marijuana, there are many
economic, health, and social
issues we must analyze. One economic study will not be the basis of
Canada's public policy decisions,
but Easton's research does conclusively show that there are economic
benefits in the legalization of
marijuana. With governments scrambling to find new sources of revenue to
pay for important social
objectives such as health care and education expect to see the idea raised in
Parliament sooner rather than
later.
Examination Paper Semester I: Managerial Economics
IIBM Institute of Business Management
Questions
1. Plot the demand schedule and
draw the demand curve for the data given for Marijuana in the case
above.
2. On the basis of the analysis
of the case above, what is your opinion about legalizing marijuana in
Canada?
Case let 2
Companies that attend to
productivity and growth simultaneously manage cost reductions very differently
from companies that focus on cost
cutting alone and they drive growth very differently from companies
that are obsessed with growth
alone. It is the ability to cook sweet and sour that under grids the
remarkable performance of
companies likes Intel, GE, ABB and Canon. In the slow growth electrotechnical
business, ABB has doubled its
revenues from $17 billion to $35 billion, largely by exploiting
new opportunities in emerging
markets. For example, it has built up a 46,000 employee organization in
the Asia Pacific region, almost
from scratch. But it has also reduced employment in North America and
Western Europe by 54,000 people.
It is the hard squeeze in the north and the west that generated the
resources to support ABB's
massive investments in the east and the south. Everyone knows about the
staggering ambition of the
Ambanis, which has fuelled Reliance's evolution into the largest private
company in India. Reliance has
built its spectacular rise on a similar ability to cook sweet and sour. What
people may not be equally
familiar with is the relentless focus on cost reduction and productivity growth
that pervades the company.
Reliance's employee cost is 4 per cent of revenues, against 15-20 per cent of
its competitors. Its sales and
distribution cost, at 3 per cent of revenues, is about a third of global
standards. It has continuously
pushed down its cost for energy and utilities to 3 per cent of revenues,
largely through 100 per cent
captive power generation that costs the company 4.5 cents per kilowatt-hour;
well below Indian utility costs,
and about 30 per cent lower than the global average. Similarly, its capital
cost is 25-30 per cent lower than
its international peers due to its legendary speed in plant commissioning
and its relentless focus on
reducing the weighted average cost of capital (WACC) that, at 13 per cent, is
the lowest of any major Indian
firm.
A Bias for
Growth
Comparing major Indian companies
in key industries with their global competitors shows that Indian
companies are running a major
risk. They suffer from a profound bias for growth. There is nothing wrong
with this bias, as Reliance has
shown. The problem is most look more like Essar than Reliance. While
they love the sweet of growth,
they are unwilling to face the sour of productivity improvement.
Nowhere is this more amply borne
out than in the consumer goods industry where the Indian giant
Hindustan Lever has consolidated
to grow at over 50 per cent while its labour productivity declined by
around 6 per cent per annum in
the same period. Its strongest competitor, Nirma, also grew at over 25 per
cent per annum in revenues but
maintained its labour productivity relatively stable. Unfortunately,
however, its return on capital
employed (ROCE) suffered by over 17 per cent. In contrast, Coca Cola,
worldwide, grew at around 7 per
cent, improved its labour productivity by 20 per cent and its return on
capital employed by 6.7 per cent.
The story is very similar in the information technology sector where
Infosys, NIIT and HCL achieve
rates of growth of over 50 per cent which compares favorably with the
world's best companies that grew
at around 30 per cent between 1994-95. NIIT, for example, strongly
believes that growth is an
impetus in itself. Its focus on growth has helped it double revenues every two
years. Sustaining profitability
in the face of such expansion is an extremely challenging task. For now,
this is a challenge Indian
InfoTech companies seem to be losing. The ROCE for three Indian majors fell
by 7 per cent annually over
1994-96. At the same time IBM Microsoft and SAP managed to improve this
ratio by 17 per cent. There are
some exceptions, however. The cement industry, which has focused on
productivity rather than on
growth, has done very well in this dimension when compared to their global
Examination Paper Semester I: Managerial Economics
IIBM Institute of Business Management
counterparts. While Mexico's
Cemex has grown about three times fast as India's ACC, Indian cement
companies have consistently
delivered better results, not only on absolute profitability ratios, but also
on
absolute profitability growth.
They show a growth of 24 per cent in return on capital employed while
international players show only
8.4 per cent. Labour productivity, which actually fell for most industries
over 1994-96, has improved at 2.5
per cent per annum for cement.
The engineering industry also
matches up to the performance standards of the best in the world.
Companies like Cummins India have
always pushed for growth as is evidenced by its 27 per cent rate of
growth, but not at the cost of
present and future profitability. The company shows a healthy excess of
almost 30 per cent over WACC,
displaying great future promise. BHEL, the public sector giant, has seen
similar success and the share
price rose by 25 per cent despite an indecisive sensex. The only note of
caution: Indian engineering
companies have not been able to improve labour productivity over time,
while international engineering
companies like ABB, Siemens and Cummins Engines have achieved
about 13.5 per cent growth in
labour productivity, on an average, in the same period. The pharmaceuticals
industry is where the problems
seem to be the worst, with growth emphasized at the cost of all other
performance. They have been
growing at over 22 per cent, while their ROCE fell at 15.9 per cent per
annum and labour productivity at
7 per cent. Compare this with some of the best pharmaceutical
companies of the world – Glaxo
Wellcome, SmithKline Beecham and Pfizer –who have consistently
achieved growth of 15-20 per
cent, while improving returns on capital employed at about
25 per cent and labour
productivity at 8 per cent. Ranbaxy is not an exception; the bias for growth at
the
cost of labour and capital
productivity is also manifest in the performance of other Indian Pharma
companies. What makes this even
worse is the Indian companies barely manage to cover their cost of
capital, while their competitors
worldwide such as Glaxo and Pfizer earn an average ROCE of 65 per
cent. In the Indian textile
industry, Arvind Mills was once the shining star. Like Reliance, it had learnt
to
cook sweet and sour. Between 1994
and 1996, it grew at an average of 30 per cent per annum to become
the world's largest denim
producer. At the same time, it also operated a tight ship, improving labour
productivity by 20 per cent.
Despite the excellent performance in the past, there are warning signals for
Arvind's future. The excess over
the WACC is only 1.5 per cent, implying it barely manages to satisfy its
investor’s expectations of return
and does not really have a surplus to re-invest in the business.
Apparently, investors also think
so, for Arvind's stock price has been falling since Q4 1994 despite such
excellent results and, at the end
of the first quarter of 1998, is less than Rs 70 compared to Rs 170 at the
end of 1994. Unfortunately,
Arvind's deteriorating financial returns over the last few years is also
typical
of the Indian textile industry.
The top three Indian companies actually showed a decline in their return
ratios in contrast to the
international majors. Nike, VF Corp and Coats Viyella showed a growth in their
returns on capital employed of
6.2 per cent, while the ROCE of Grasim and Coats Viyella (India) fell by
almost 2 per cent per annum. Even
in absolute returns on assets or on capital employed, Indian companies
fare a lot worse. While Indian
textile companies just about cover their WACC, their international rivals
earn about 8 per cent in excess
of their cost of capital.
Questions
1. Is Indian companies running a
risk by not giving attention to cost cutting?
2. Discuss whether Indian
Consumer goods industry is growing at the cost of future profitability.
3. Discuss capital and labour
productivity in engineering context and pharmaceutical industries in
India.
4. Is textile industry in India
performing better than its global competitors?
END OF SECTION B
Examination Paper Semester I: Managerial Economics
IIBM Institute of Business Management
Section C:
Applied Theory (30 marks)
· This section
consists of Applied Theory Questions.
· Answer all the
questions.
· Each question
carries 15 marks.
· Detailed
information should form the part of your answer (Word limit 200 to 250 words).
1. Free trade promotes a mutually
profitable regional division of labour, greatly enhances the
potential real national product
of all nations and makes possible higher standards of living all
over the globe.” Critically
explain and examine the statement.
2. What role does a decision tree
play in business decision-making? Illustrate the choice between
two investment projects with the
help of a decision tree assuming hypothetical conditions about
the states of nature, probability
distribution, and corresponding pay-offs.
S-1-91110
END OF SECTION C
No comments:
Post a Comment