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
Examination Paper Semester I: Marketing Management
IIBM Institute of Business Management
IIBM Institute of Business Management
Semester-1 Examination Paper MM.100
Marketing Management
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 4 marks each.
Part one:
Multiple choices:
1. It is a concept where goods are produced without taking into consideration the choices or tastes of
customers
a. Marketing mix
b. Production concept
c. Marketing concept
d. Relationship marketing
2. It involves individuals who buys products or services for personal use and not for manufacture or
resale
a. Environment analysis
b. Macro environment
c. Micro environment
d. Consumer
3. It is the groups of people who interact formally or informally influencing each other’s attitudes&
behavior
a. Consumer behavior
b. Culture
c. Reference groups
d. Primary groups
4. The concept of the product that passes through various changes in its total life known as
a. Product life cycle
b. Line stretching
c. Consumer adoption
d. Product
5. It refers to unique set of brand associations that brand strategist aspires to create or maintain
a. Branding
b. Packaging
c. Brand identity
d. Brand image
Examination Paper Semester I: Marketing Management
IIBM Institute of Business Management
6. It involves a pricing strategy that charges customers different prices for the same product or
service
a. Promotional pricing
b. Price discrimination
c. Non price competition
d. None
7. It refers to an arrangement where another company through its own marketing channel sells the
products of one producers
a. End customer
b. Wholesaler
c. Retailing
d. Strategic channel alliance
8. It involves facility consisting of the means & equipments necessary for the movement of
passengers of goods
a. Logistics
b. Warehousing
c. Transportation
d. None
9. The advertising which is used to inform consumers about a new product or feature & to build
primary demands is known as
a. Advertising
b. Informative advertising
c. Persuasive advertising
d. Advertising strategy
10. An art that predicts the likelihood of economic activity on the basis of certain assumptions
a. Compensation
b. Sales forecasting
c. Sales budgeting
d. Selling policy
Part Two:
1. Write a note on importance of consumer behavior for a business firm?
2. Define the term ‘Price’.
3. Distinguish between Marketing Concept and Selling Concept?
4. What are the new trends in advertisement?
5. Briefly explain the following :
a) Socio –culture environment
b) Marketing environment interface.
END OF SECTION A
Examination Paper Semester I: Marketing Management
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
Ask the company top brass what ‘almost there’ means. The answer: a premier Indian retail company that
has come to be known as a specialty chain of apparel and accessories. With 52 product categories under
one roof, Shoppers’ Stop has a line-up of 350 brands. Set up and headed by former Corona employee, B.
S. Nagesh, Shoppers’ Stop is India’s answer to Selfridges and Printemps. As it proudly announces, ‘We
don’t sell, we help you buy.’ Back in 1991, there was the question of what to retail. Should it be a
supermarket or a departmental store? Even an electronics store was considered. Finally, common sense
and understanding won out. The safest bet, for the all-male team was to retail men’s wear. They knew the
male psyche and felt that they had discerning taste in men’s clothing. The concept would be that of a
lifestyle store in a luxurious space, which would make for a great shopping experience. The first
Shoppers’ Stop store took shape in Andheri, Mumbai, in October 1991, with an investment of nearly Rs.
20 lakh. The original concept that formed the basis of a successful marketing campaign for seven years is
here to stay. And the result is an annual turnover of Rs. 160 crores and five stores, nine years later.
Everything went right from the beginning, except for one strange happening. More than 60 per cent of the
customers who walked into Shoppers’ Stop in Mumbai were women. This gave rise to ideas. Soon, the
store set up its women’s section. Later, it expanded to include children’s wear and then, household
accessories. The second store in Bangalore came in 1995. The store at Hyderabad followed in 1998 with
the largest area of 60,000 sq. ft. The New Delhi and Jaipur stores were inaugurated in 1999. All this
while, the product range kept increasing to suit customer needs. The most recent experiment was home
furnishings. Secure in the knowledge that organised retailing in global brands was still in its infancy in
India, Shoppers’ Stop laid the ground rules which the competition followed. The biggest advantage for
Shoppers’ Stop is that it knows how the Indian consumer thinks and feels while shopping. Yes, feeling –
for in India, shopping remains an outing. And how does it compare itself to foreign stores? While it is not
modeled on any one foreign retailer, the ‘basic construct’ is taken from the experience of a number of
successfully managed retail companies. It has leveraged expertise for a critical component like technology
from all over the world, going as far as hiring expatriates from Littlewoods and using state-of-the-art ERP
models. Shoppers’ Stop went a step further by even integrating its financial system with the ERP model.
Expertise was imported wherever it felt that expertise available in-house was inadequate. But the store felt
there was one acute problem. A shortage of the most important resource of them all was trained humans.
Since Indian business institutes did not have professional courses in retail management, people were hired
from different walks of life and the training programme was internalized. By 1994, the senior executives
at Shoppers’ Stop were taking lectures at management institutes in Mumbai. The Narsee Monjee Institute
of Management Studies (NMIMS) even restructured its course to include retail management as a subject.
Getting the company access to the latest global retail trends and exchange of information with business
greats was an exclusive membership to the Intercontinental Group of Department Stores (IGDS). It allows
membership by invitation to one company from a country and Shoppers’ Stop rubs shoulders with 29 of
the hottest names in retailing – Selfridges from the UK, C.K. Tang from Singapore, Lamcy Plaza from
Dubai and the like. With logistics I in place, the accent moved to the customer. Shoppers’ Stop conducted
surveys with ORG-MARG and Indian Market Research Bureau (IMRB) and undertook in-house
wardrobe audits. The studies confirmed what it already knew. The Indian customer is still evolving and is
very different from, say, a European customer, who knows exactly what he wants to purchase, walks up
to a shelf, picks up the merchandise, pays and walks out. In India, customers like to touch and feel the
Examination Paper Semester I: Marketing Management
IIBM Institute of Business Management
merchandise, and scout for options. Also, the majority of Indian shoppers still prefer to pay in cash. So,
transactions must be in cash as against plastic money used the world over. Additionally, the Indian
customer likes being served – whether it is food, or otherwise. The company’s customer profile includes
people who want the same salesperson each time they came to the store to walk them through the shop
floors and assist in the purchase. Others came with families, kids and maids in tow and expected to be
suitably attended to. Still others wanted someone to carry the bags. So, the shops have self-help counters,
with an assistant at hand for queries or help. The in-house wardrobe audit also helped with another facet
of the business. It enabled Shoppers’ Stop to work out which brands to stock, based on customer
preferences. In fact, the USP of Shoppers’ Stop lies in judiciously selected global brands, displayed
alongside an in-house range of affordable designer wear. The line-up includes Levi’s, Louis Philippe,
Allen Solly, Walt Disney, Ray Ban and Reebok, besides in-house labels STOP and I. Brand selection is
the same across the five locations, though the product mix may be somewhat city-based to accommodate
cuts and styles in women’s wear, as well as allowing for seasonal variations (winter in Delhi, for instance,
is a case in point). Stocking of brands is based on popular demand – recently, Provogue, MTV Style, and
Benetton have been added. In-house labels are available at competitive prices and target the value-formoney
customer and make up around 12 per cent of Shoppers’ Stop’s business. Sometimes in-house
brands plug the price gap in certain product categories. To cash in on this, the company has big plans for
its in-house brands: from re-branding to repositioning, to homing in on product categories where existing
brands are not strong. Competition between brands is not an issue, because being a trading house, all
brands get equal emphasis. The in-house brand shopper is one who places immense trust in the company
and the quality of its goods and returns for repeat buys. And the company reposed its faith in regular
customers by including them in a concept called the First Citizen’s Club (FCC). With 60,000 odd
members, FCC customers account for 10 per cent of entries and for 34 per cent of the turnover. It was the
sheer appeal of the experience that kept pulling these people back. Not one to let such an opportunity
pass, the company ran a successful ad campaign (that talks about just this factor) in print for more than
eight years. The theme is still the same. In 1999, a TV spot, which liked the shopping experience to the
slowing down of one’s internal clock and the beauty of the whole experience, was aired. More recently,
ads that spell out the store’s benefits (in a highly oblique manner) are being aired.
The campaign is based on entries entered in the Visitors’ Book. None of the ads has a visual or text – or
any heavy handedly direct reference to the store or the merchandise. The ads only show shoppers having
the time of their lives in calm and serene locales, or elements that make shopping at the store a pleasure –
quite the perfect getaway for a cosmopolitan shopper aged between 25 and 45. The brief to the agency,
Contract, ensured that brand recall came in terms of the shopping experience, not the product. And it has
w
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
Examination Paper Semester I: Marketing Management
IIBM Institute of Business Management
IIBM Institute of Business Management
Semester-1 Examination Paper MM.100
Marketing Management
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 4 marks each.
Part one:
Multiple choices:
1. It is a concept where goods are produced without taking into consideration the choices or tastes of
customers
a. Marketing mix
b. Production concept
c. Marketing concept
d. Relationship marketing
2. It involves individuals who buys products or services for personal use and not for manufacture or
resale
a. Environment analysis
b. Macro environment
c. Micro environment
d. Consumer
3. It is the groups of people who interact formally or informally influencing each other’s attitudes&
behavior
a. Consumer behavior
b. Culture
c. Reference groups
d. Primary groups
4. The concept of the product that passes through various changes in its total life known as
a. Product life cycle
b. Line stretching
c. Consumer adoption
d. Product
5. It refers to unique set of brand associations that brand strategist aspires to create or maintain
a. Branding
b. Packaging
c. Brand identity
d. Brand image
Examination Paper Semester I: Marketing Management
IIBM Institute of Business Management
6. It involves a pricing strategy that charges customers different prices for the same product or
service
a. Promotional pricing
b. Price discrimination
c. Non price competition
d. None
7. It refers to an arrangement where another company through its own marketing channel sells the
products of one producers
a. End customer
b. Wholesaler
c. Retailing
d. Strategic channel alliance
8. It involves facility consisting of the means & equipments necessary for the movement of
passengers of goods
a. Logistics
b. Warehousing
c. Transportation
d. None
9. The advertising which is used to inform consumers about a new product or feature & to build
primary demands is known as
a. Advertising
b. Informative advertising
c. Persuasive advertising
d. Advertising strategy
10. An art that predicts the likelihood of economic activity on the basis of certain assumptions
a. Compensation
b. Sales forecasting
c. Sales budgeting
d. Selling policy
Part Two:
1. Write a note on importance of consumer behavior for a business firm?
2. Define the term ‘Price’.
3. Distinguish between Marketing Concept and Selling Concept?
4. What are the new trends in advertisement?
5. Briefly explain the following :
a) Socio –culture environment
b) Marketing environment interface.
END OF SECTION A
Examination Paper Semester I: Marketing Management
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
Ask the company top brass what ‘almost there’ means. The answer: a premier Indian retail company that
has come to be known as a specialty chain of apparel and accessories. With 52 product categories under
one roof, Shoppers’ Stop has a line-up of 350 brands. Set up and headed by former Corona employee, B.
S. Nagesh, Shoppers’ Stop is India’s answer to Selfridges and Printemps. As it proudly announces, ‘We
don’t sell, we help you buy.’ Back in 1991, there was the question of what to retail. Should it be a
supermarket or a departmental store? Even an electronics store was considered. Finally, common sense
and understanding won out. The safest bet, for the all-male team was to retail men’s wear. They knew the
male psyche and felt that they had discerning taste in men’s clothing. The concept would be that of a
lifestyle store in a luxurious space, which would make for a great shopping experience. The first
Shoppers’ Stop store took shape in Andheri, Mumbai, in October 1991, with an investment of nearly Rs.
20 lakh. The original concept that formed the basis of a successful marketing campaign for seven years is
here to stay. And the result is an annual turnover of Rs. 160 crores and five stores, nine years later.
Everything went right from the beginning, except for one strange happening. More than 60 per cent of the
customers who walked into Shoppers’ Stop in Mumbai were women. This gave rise to ideas. Soon, the
store set up its women’s section. Later, it expanded to include children’s wear and then, household
accessories. The second store in Bangalore came in 1995. The store at Hyderabad followed in 1998 with
the largest area of 60,000 sq. ft. The New Delhi and Jaipur stores were inaugurated in 1999. All this
while, the product range kept increasing to suit customer needs. The most recent experiment was home
furnishings. Secure in the knowledge that organised retailing in global brands was still in its infancy in
India, Shoppers’ Stop laid the ground rules which the competition followed. The biggest advantage for
Shoppers’ Stop is that it knows how the Indian consumer thinks and feels while shopping. Yes, feeling –
for in India, shopping remains an outing. And how does it compare itself to foreign stores? While it is not
modeled on any one foreign retailer, the ‘basic construct’ is taken from the experience of a number of
successfully managed retail companies. It has leveraged expertise for a critical component like technology
from all over the world, going as far as hiring expatriates from Littlewoods and using state-of-the-art ERP
models. Shoppers’ Stop went a step further by even integrating its financial system with the ERP model.
Expertise was imported wherever it felt that expertise available in-house was inadequate. But the store felt
there was one acute problem. A shortage of the most important resource of them all was trained humans.
Since Indian business institutes did not have professional courses in retail management, people were hired
from different walks of life and the training programme was internalized. By 1994, the senior executives
at Shoppers’ Stop were taking lectures at management institutes in Mumbai. The Narsee Monjee Institute
of Management Studies (NMIMS) even restructured its course to include retail management as a subject.
Getting the company access to the latest global retail trends and exchange of information with business
greats was an exclusive membership to the Intercontinental Group of Department Stores (IGDS). It allows
membership by invitation to one company from a country and Shoppers’ Stop rubs shoulders with 29 of
the hottest names in retailing – Selfridges from the UK, C.K. Tang from Singapore, Lamcy Plaza from
Dubai and the like. With logistics I in place, the accent moved to the customer. Shoppers’ Stop conducted
surveys with ORG-MARG and Indian Market Research Bureau (IMRB) and undertook in-house
wardrobe audits. The studies confirmed what it already knew. The Indian customer is still evolving and is
very different from, say, a European customer, who knows exactly what he wants to purchase, walks up
to a shelf, picks up the merchandise, pays and walks out. In India, customers like to touch and feel the
Examination Paper Semester I: Marketing Management
IIBM Institute of Business Management
merchandise, and scout for options. Also, the majority of Indian shoppers still prefer to pay in cash. So,
transactions must be in cash as against plastic money used the world over. Additionally, the Indian
customer likes being served – whether it is food, or otherwise. The company’s customer profile includes
people who want the same salesperson each time they came to the store to walk them through the shop
floors and assist in the purchase. Others came with families, kids and maids in tow and expected to be
suitably attended to. Still others wanted someone to carry the bags. So, the shops have self-help counters,
with an assistant at hand for queries or help. The in-house wardrobe audit also helped with another facet
of the business. It enabled Shoppers’ Stop to work out which brands to stock, based on customer
preferences. In fact, the USP of Shoppers’ Stop lies in judiciously selected global brands, displayed
alongside an in-house range of affordable designer wear. The line-up includes Levi’s, Louis Philippe,
Allen Solly, Walt Disney, Ray Ban and Reebok, besides in-house labels STOP and I. Brand selection is
the same across the five locations, though the product mix may be somewhat city-based to accommodate
cuts and styles in women’s wear, as well as allowing for seasonal variations (winter in Delhi, for instance,
is a case in point). Stocking of brands is based on popular demand – recently, Provogue, MTV Style, and
Benetton have been added. In-house labels are available at competitive prices and target the value-formoney
customer and make up around 12 per cent of Shoppers’ Stop’s business. Sometimes in-house
brands plug the price gap in certain product categories. To cash in on this, the company has big plans for
its in-house brands: from re-branding to repositioning, to homing in on product categories where existing
brands are not strong. Competition between brands is not an issue, because being a trading house, all
brands get equal emphasis. The in-house brand shopper is one who places immense trust in the company
and the quality of its goods and returns for repeat buys. And the company reposed its faith in regular
customers by including them in a concept called the First Citizen’s Club (FCC). With 60,000 odd
members, FCC customers account for 10 per cent of entries and for 34 per cent of the turnover. It was the
sheer appeal of the experience that kept pulling these people back. Not one to let such an opportunity
pass, the company ran a successful ad campaign (that talks about just this factor) in print for more than
eight years. The theme is still the same. In 1999, a TV spot, which liked the shopping experience to the
slowing down of one’s internal clock and the beauty of the whole experience, was aired. More recently,
ads that spell out the store’s benefits (in a highly oblique manner) are being aired.
The campaign is based on entries entered in the Visitors’ Book. None of the ads has a visual or text – or
any heavy handedly direct reference to the store or the merchandise. The ads only show shoppers having
the time of their lives in calm and serene locales, or elements that make shopping at the store a pleasure –
quite the perfect getaway for a cosmopolitan shopper aged between 25 and 45. The brief to the agency,
Contract, ensured that brand recall came in terms of the shopping experience, not the product. And it has
w
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