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MS-9   June , 2008

MS-9 : Managerial economics

1. Explain why the average cost curve is U-shaped. The long run average cost curve is always an envelope of short run average cost curves. Discuss.

2. Explain the equilibrium of a firm by using the marginal cost and marginal revenue curves. Why is the firm under perfect competition described as a price taker ?

3. Explain break-even analysis on the basis of its concept, use, drawbacks and advantages.

4. Write notes on the following :

(a) Discounting principle

(b) The Equi-marginal principle

5. Distinguish between the following :

(a) Economies of scale and Economies of scope

(b) Demand curve and Demand schedule

6 . Choose the correct answer.

(i) The responsiveness or sensitivity of a firm's profits to changes in output is measured by a firm's

(a) operating leverage

(b) contribution margin

(c) degree of operating leverage

(d) returns to scale

(ii) The contribution margin per unit is equal to the

(a) price'of a good

(b) difference between total revenue and total cost

(c) difference between price and average total cost

(d) difference between price and average variable cost ,

(iii) Which type of market structure does not typically

have a negatively-sloped market demand curve ?

(a) Monopoly

(b) Perfect competition

(c) Oligopoly

(d) all of the above typically have negatively-stoped market demand curves

(iv) The restaurant industry has a market structure that comes closest to

(a) Monopolistic competition

(b) Oligopoly

(c) Perfect competition

(d) Monopoly

(v) If marginal revenue is greater than marginal cost, increasing output would

(a) reduce profits

(b) increase profits

(c) have no impact on profits

(d) reduce the rate of growth in profits

8. Read the following text and answer the questions that follow :

THEORY AND REAL WORLD MARKETS

The theory of perfect competition describes how firms act in a market structure where (1) there are many buyers and sellers, none of which is large in relation to

total sales or purchases; (21 sellers sell a homogeneous product; (3) buyers and sellers have all relevant information; (a) there is easy entry and exit. These assumptions are closely met in very few real world markets. These assumptions may however be approximated in some real' world markets. In such markets, the number of sellers may not be large enough for every firm to be a price taker, but the firm's control over price may be negligible. The amount of control may be so negligible, in fact, that the firm acts as if it were a perfectly competitive firm.

Similarly, buyers may not have all relevant information concerning price and quality, but they may still have a great deal of information and the information

they do not have may not matter. The products that the firms in the industry sell may not be homogeneous, but the differences may be inconsequential. In short, a market that does not meet the assumptions of perfect competition may nonetheless approximate those assumptions to such a degree that it

   behaves as if it were a perfectly competitive market. If so, the theory of perfect competition can be used to predict the market's behaviour.

Questions ;

(a) A price taker does not have the ability to control the price of the product it sells. What does this mean ?

(b) Why is a perfectly competitive firm a price taker ?

(c) The horizontal demand curve for the perfectly competitive firm signifies that it cannot sell any of its products for a price higher than the market equilibrium price. Why can't it ?

(d) Suppose the firms in a real world market do not sell a homogeneous product. Does it necessarily follow that the market is not perfectly competitive ?