GM04
Managerial Economics
Assignment I
Assignment Code: 2012 GM04 B1 Last Date of Submission: 15th October 2012
Maximum Marks: 100
Attempt all Questions. All questions carry equal marks.
Section A
1. “Managerial Economics is integration of economic theory and business practice for the purpose of facilitating decision-making and forward planning by management.” Elucidate the statement. (20)
2. Write short note on the following concepts:
a. Isoquants
b. Break-even Analysis
c. Incremental Reasoning
d. Difference between economies and diseconomies of scale. (4x5=20)
3. Why is Long Run Average Cost Curve known as the Planning Curve? (20)
4. Explain the Percentage Method and Total Outlay Method for measurement of Elasticity of Demand with the help of suitable illustration. (20)
Section B
Case Study: The Production Process in Vandana Enterprise
Vandana Enterprise Pvt. Ltd is owned by the Kumar family. Mr Ramesh Kumar, the Managing Director and his daughter Vandana, jointly look after the company affairs. Mr Gopal Kumar is the Chairman, but the day-to-day operations are handled by the father and daughter team. There are about 300 employees and the sole aim of the company is to expand the market share in the textile market at home, as well as abroad. Twenty-five years ago, when the company was started in a small town in Punjab, there were around 350 workers. The company used indigenous and old technology to produce clothes. Labour was mainly used while machines were used minimally. The plants were modernized and mechanized over the years by acquiring the latest technology from Japan and Europe, the result being that the number of machines were doubled and production quadrupled from 15,000 metres of cloth to about 62,000 metres of cloth everyday. Vandana Enterprise had specialized till now only in the spinning and weaving of white linen and had no plans of changing the patterns of production. However, after acquiring a modern machine from Japan, the company started planning the printing of bed sheets, pillow covers, etc., as a market for it existed all over India. The company had, moreover, already established distribution channels and had significant presence. Moreover, the South Asian, South-East Asian and Asia Pacific region proved to be a great export market.
Mr Kumar and Miss Kumar assumed that in order to increase their sales and make a bigger impact in the international market, the company had to improve on market information, regarding the specific needs and demands of customers in different markets. The father and daughter team felt that the company had achieved maximum technical efficiency and the maximum production efficiency as the man-machine ratio was optimal.
Mr Gopal Kumar, Mr Ramesh Kumar’s older brother felt that mechanizing the plants further could increase the production capacity to a great extent (more than improving on market information). Gopal Kumar didn’t mind retrenching some of the labour, but Ramesh Kumar and Vandana, thought the present man-machine ratio of 1;7:1 as maximum for the company, and the further import of the machine could not increase the production unless more people were hired – that too in exact accordance with the machines being bought/hired. Hence, the best way to improve production and sales is by improving on market information, as there is unanimous decision of the management that at no cost will more workers will be hired.
Questions:
I Can you comment on the returns to scale and factors (of production) of Vandana Enterprise, which the company experienced with mechanization of its plants?
II When Mr. Gopal Kumar insists that production can be increased by further mechanization of the plants, what is the assumption regarding the production function that has to be valid? (10+10=20)
GM04
Managerial Economics
Assignment II
Assignment Code: 2012 GM04 B2 Last Date of Submission: 15th Nov 2012
Maximum Marks: 100
Attempt all Questions. All questions carry equal marks.
Section A
1. What do you mean by Monopolistic Competition? Derive firm’s equilibrium in monopolistic competition. (20)
2. Write short note on:
a. Baumol’s Sales Revenue Maximization Model
b. Difference between Risk and Uncertainty (10+10=20)
3. How does a seller practice price discrimination? What are the necessary conditions for price discrimination to be possible? (20)
4. Explain the MR and MC approach for equilibrium determination of firm in short run. (20)
Section B
Case Study: Cartel Formation by the Organization of
Petroleum Exporting Countries (OPEC)
OPEC is possibly the most renowned of all cartels. It was established in 1960 by 5 major oil-exporting countries namely, Saudi Arabia, Iran, Iraq, Kuwait and Venezuela. OPEC based itself on the principles of coordination and unification of the petroleum policies of member countries and the organization of means to ensure stabilization of prices, removing disadvantageous fluctuations.
Before 1960, countries producing oil had seen mounting/escalating clashes with international oil companies, which extracted oil under a concessionary agreement, whereby these companies could extract oil in return for royalties. In effect, the oil producing countries had little say over the price, output and hence the revenue. Till 1973, despite the existence of the cartel, OPEC member countries had virtually no control over oil production.
By 1973 with 13 members, i.e. Algeria, Gabon, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates, Venezuela and Ecuador, the OPEC pricing policy through the 1970s comprised of setting a market price for Saudi Arabia (the market leader in terms of highest volume in production) and leaving other OPEC members to set their prices thereafter.
The cartel operated smoothly when demand conditions were buoyant. The reasons for this being, that oil has an inelastic demand in the international market. Consequently, the members earned huge revenues with a rise in price. In 1973-74, after the Arab-Israeli War, OPEC increased the price from $ 3 per barrel to over $ 12 per barrel. This was maintained till 1979-80. Sales hardly showed a decline on account of the four-fold rise. After the 1980 post - Iranian revolution, when the price was increased from $ 15 per barrel from $ 40 per barrel, the world demand dropped. This decline in demand was as a result to:
1. Recession in the world economy (later, economists realized that recession was due to the soil shock itself).
2. Steep rise in oil price resulting in conservation policies. (For instance, lowering thermostats, switching to small fuel and efficient automobiles, etc).
3. Expanded exploration and production by UK and Norway in the North Sea by USA in Alaska and by Mexico in newly discovered fields. Switching to other sources of energy.
The result was a drastic fall in OPEC’s share of world oil production (from 55 to 60 percent in 1974 to less than 40 percent in 1994-95).
In order to restore its old glory, OPEC met frequently to settle aspects like oil prices and production quotas. Hit by the harsh reality of declining demand, OPEC members settled down on a production ceiling of 16 million barrels per day to keep the price up. This was the start of the break-up of the cartel.
Two trends were visible. On one hand, countries, which were densely populated and had low petroleum reserves like Nigeria, Indonesia and Iran wanted to charge high prices to maximize their short-run profit, while on the other hand, thinly populated and large reserve countries like Saudi Arabia and Kuwait preferred low prices to dissuade conservation and exploration of oil by bob-OPEC countries. They targeted long-term profits. Prices declines in the world market and ranged between $ 15 and $ 20. This prompted member countries like Venezuela and Nigeria to cheat by producing more than their quota.
With the glut in the oil market, OPEC could not regain its former glory, as it could not increase the price as desired. There was a temporary surge in price after the Gulf War between Kuwait and Iraq, as the supply of oil was cut off from these two oil-rich countries. No sooner had the war ended, the oil prices fell. Today the price of crude oil, in real terms stands at roughly $ 16 per barrel, while it was @ 2.50 per barrel in 1973.
OPEC clearly is trying to dominate the scene and new strategies are continuously devised to revive oil prices by strengthening oil quotas. The reason for low oil prices have been already outlined. On the demand side, the development of energy saving technology, plus a rise in fuel taxes have created a relatively slow growth in consumption. On the supply side, there is a growing supply of crude oil by non OPEC countries and the adoption of a relatively high OPEC production ceiling of 24.5 million barrels per day from 1994-95. All these factors have upset the demand-supply harmony.
The primary concern of OPEC members was how to make non-OPEC members control their production and how to stop some of them (OPEC members) from resorting to unethical production of more than the allotted quota. A typical production by OPEC has been an over-production of 1 million barrels per day.
Questions:
I What are the pre-requisites for cartel formation? Is it possible to have cartels under all kinds of market structures?
II Assuming that analysts predict a low future price of oil in the international market to continue for sometime, what should the likely impact on the OPEC be? (10+10=20)
Managerial Economics
Assignment I
Assignment Code: 2012 GM04 B1 Last Date of Submission: 15th October 2012
Maximum Marks: 100
Attempt all Questions. All questions carry equal marks.
Section A
1. “Managerial Economics is integration of economic theory and business practice for the purpose of facilitating decision-making and forward planning by management.” Elucidate the statement. (20)
2. Write short note on the following concepts:
a. Isoquants
b. Break-even Analysis
c. Incremental Reasoning
d. Difference between economies and diseconomies of scale. (4x5=20)
3. Why is Long Run Average Cost Curve known as the Planning Curve? (20)
4. Explain the Percentage Method and Total Outlay Method for measurement of Elasticity of Demand with the help of suitable illustration. (20)
Section B
Case Study: The Production Process in Vandana Enterprise
Vandana Enterprise Pvt. Ltd is owned by the Kumar family. Mr Ramesh Kumar, the Managing Director and his daughter Vandana, jointly look after the company affairs. Mr Gopal Kumar is the Chairman, but the day-to-day operations are handled by the father and daughter team. There are about 300 employees and the sole aim of the company is to expand the market share in the textile market at home, as well as abroad. Twenty-five years ago, when the company was started in a small town in Punjab, there were around 350 workers. The company used indigenous and old technology to produce clothes. Labour was mainly used while machines were used minimally. The plants were modernized and mechanized over the years by acquiring the latest technology from Japan and Europe, the result being that the number of machines were doubled and production quadrupled from 15,000 metres of cloth to about 62,000 metres of cloth everyday. Vandana Enterprise had specialized till now only in the spinning and weaving of white linen and had no plans of changing the patterns of production. However, after acquiring a modern machine from Japan, the company started planning the printing of bed sheets, pillow covers, etc., as a market for it existed all over India. The company had, moreover, already established distribution channels and had significant presence. Moreover, the South Asian, South-East Asian and Asia Pacific region proved to be a great export market.
Mr Kumar and Miss Kumar assumed that in order to increase their sales and make a bigger impact in the international market, the company had to improve on market information, regarding the specific needs and demands of customers in different markets. The father and daughter team felt that the company had achieved maximum technical efficiency and the maximum production efficiency as the man-machine ratio was optimal.
Mr Gopal Kumar, Mr Ramesh Kumar’s older brother felt that mechanizing the plants further could increase the production capacity to a great extent (more than improving on market information). Gopal Kumar didn’t mind retrenching some of the labour, but Ramesh Kumar and Vandana, thought the present man-machine ratio of 1;7:1 as maximum for the company, and the further import of the machine could not increase the production unless more people were hired – that too in exact accordance with the machines being bought/hired. Hence, the best way to improve production and sales is by improving on market information, as there is unanimous decision of the management that at no cost will more workers will be hired.
Questions:
I Can you comment on the returns to scale and factors (of production) of Vandana Enterprise, which the company experienced with mechanization of its plants?
II When Mr. Gopal Kumar insists that production can be increased by further mechanization of the plants, what is the assumption regarding the production function that has to be valid? (10+10=20)
GM04
Managerial Economics
Assignment II
Assignment Code: 2012 GM04 B2 Last Date of Submission: 15th Nov 2012
Maximum Marks: 100
Attempt all Questions. All questions carry equal marks.
Section A
1. What do you mean by Monopolistic Competition? Derive firm’s equilibrium in monopolistic competition. (20)
2. Write short note on:
a. Baumol’s Sales Revenue Maximization Model
b. Difference between Risk and Uncertainty (10+10=20)
3. How does a seller practice price discrimination? What are the necessary conditions for price discrimination to be possible? (20)
4. Explain the MR and MC approach for equilibrium determination of firm in short run. (20)
Section B
Case Study: Cartel Formation by the Organization of
Petroleum Exporting Countries (OPEC)
OPEC is possibly the most renowned of all cartels. It was established in 1960 by 5 major oil-exporting countries namely, Saudi Arabia, Iran, Iraq, Kuwait and Venezuela. OPEC based itself on the principles of coordination and unification of the petroleum policies of member countries and the organization of means to ensure stabilization of prices, removing disadvantageous fluctuations.
Before 1960, countries producing oil had seen mounting/escalating clashes with international oil companies, which extracted oil under a concessionary agreement, whereby these companies could extract oil in return for royalties. In effect, the oil producing countries had little say over the price, output and hence the revenue. Till 1973, despite the existence of the cartel, OPEC member countries had virtually no control over oil production.
By 1973 with 13 members, i.e. Algeria, Gabon, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates, Venezuela and Ecuador, the OPEC pricing policy through the 1970s comprised of setting a market price for Saudi Arabia (the market leader in terms of highest volume in production) and leaving other OPEC members to set their prices thereafter.
The cartel operated smoothly when demand conditions were buoyant. The reasons for this being, that oil has an inelastic demand in the international market. Consequently, the members earned huge revenues with a rise in price. In 1973-74, after the Arab-Israeli War, OPEC increased the price from $ 3 per barrel to over $ 12 per barrel. This was maintained till 1979-80. Sales hardly showed a decline on account of the four-fold rise. After the 1980 post - Iranian revolution, when the price was increased from $ 15 per barrel from $ 40 per barrel, the world demand dropped. This decline in demand was as a result to:
1. Recession in the world economy (later, economists realized that recession was due to the soil shock itself).
2. Steep rise in oil price resulting in conservation policies. (For instance, lowering thermostats, switching to small fuel and efficient automobiles, etc).
3. Expanded exploration and production by UK and Norway in the North Sea by USA in Alaska and by Mexico in newly discovered fields. Switching to other sources of energy.
The result was a drastic fall in OPEC’s share of world oil production (from 55 to 60 percent in 1974 to less than 40 percent in 1994-95).
In order to restore its old glory, OPEC met frequently to settle aspects like oil prices and production quotas. Hit by the harsh reality of declining demand, OPEC members settled down on a production ceiling of 16 million barrels per day to keep the price up. This was the start of the break-up of the cartel.
Two trends were visible. On one hand, countries, which were densely populated and had low petroleum reserves like Nigeria, Indonesia and Iran wanted to charge high prices to maximize their short-run profit, while on the other hand, thinly populated and large reserve countries like Saudi Arabia and Kuwait preferred low prices to dissuade conservation and exploration of oil by bob-OPEC countries. They targeted long-term profits. Prices declines in the world market and ranged between $ 15 and $ 20. This prompted member countries like Venezuela and Nigeria to cheat by producing more than their quota.
With the glut in the oil market, OPEC could not regain its former glory, as it could not increase the price as desired. There was a temporary surge in price after the Gulf War between Kuwait and Iraq, as the supply of oil was cut off from these two oil-rich countries. No sooner had the war ended, the oil prices fell. Today the price of crude oil, in real terms stands at roughly $ 16 per barrel, while it was @ 2.50 per barrel in 1973.
OPEC clearly is trying to dominate the scene and new strategies are continuously devised to revive oil prices by strengthening oil quotas. The reason for low oil prices have been already outlined. On the demand side, the development of energy saving technology, plus a rise in fuel taxes have created a relatively slow growth in consumption. On the supply side, there is a growing supply of crude oil by non OPEC countries and the adoption of a relatively high OPEC production ceiling of 24.5 million barrels per day from 1994-95. All these factors have upset the demand-supply harmony.
The primary concern of OPEC members was how to make non-OPEC members control their production and how to stop some of them (OPEC members) from resorting to unethical production of more than the allotted quota. A typical production by OPEC has been an over-production of 1 million barrels per day.
Questions:
I What are the pre-requisites for cartel formation? Is it possible to have cartels under all kinds of market structures?
II Assuming that analysts predict a low future price of oil in the international market to continue for sometime, what should the likely impact on the OPEC be? (10+10=20)
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