GM04

Managerial Economics
Assignment No.I

Assignment Code: 2013GM04A1 Last Date of Submission: 15th April 2013

Maximum Marks:100

Attempt all the questions. All the questions are compulsory and carry equal marks.

Section-A
Ques.1 Managerial Economics is the integration of economic theory with business practice for the
purpose of facilitating decision making and forward planning by manager. Explain
and comment.

Ques.2 Define scarcity and opportunity cost. Show how these concepts are useful in
managerial decision making

Ques.3 Cardinal Utility postulates that Utility can be measured in monetary units by the
amount of money consumer is ready to sacrifice for another unit of commodity. Do you
agree and Why?

Ques.4 Describe the key non price factors that influence demand.

Section-B

Case Study : Hindustan Automobile Workers Federation

A.Mahalingam, the President of the Hindustan Automobile Workers Federation suggested an average
reduction of 4 percent in the price of a car. The automobile market was weak, which resulted in
unemployment. Lower prices would lead to greater sales and would stimulate employment.
Mahalingam believed that a 4 percent reduction in price would increase sales by 16 per cent.

R.Chatterjee, representing the managements of the automobile manufacturers disagreed with

Mahalingams estimation. Chatterjee cited studies which indicated price elasticities ranging from 0.5 to
1.5. Chatterjee made it clear that he was referring to the elasticity of demand in response to a
permanent price change of all manufacturers. He admitted that the elasticity to a temporary price cut
might be greater. The studies to which Chatterjee referred found elasticities ranging from 0.65 to 1.53.

Questions

1. Explain the concept of elasticity of demand and the factors that effect it.
2. Interpret the meaning of R. Chatterjees demand estimate ranging from .65 to 1.53. Explain .
the significance of demand elasticity in taking business decisions

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 GM04
Managerial Economics
Assignment No.II

Assignment Code: 2013GM04A2 Last Date of Submission: 15th May 2013

Maximum Marks:100

Attempt all the questions. All the questions are compulsory and carry equal marks.

Section-A
Ques.1 How do changes in income affect the slope of the budget constraint? Explain. What is
the significance of the point of tangency between an indifference curve and the budget
line?
Ques.2 Why a firm under perfect competition is described as price-maker? Deduce its equilibrium
conditions in short run.

Ques.3 The supply curve of the monopolist is indeterminate. Discuss.

Ques. 4 Fill in the blanks in the following table :

No. of units Total Marginal Product Average product of

of variable output of variable input variable output
input (No. of
units)
3 - Unknown 30
4 - 20 -
5 125 - -
6 - 5 -
7 - - 19

Section-B
Case Study : AIRLINE FARES

As more airlines are entering Indias domestic aviation market, it is leading to increased competition,
resulting in drastic fare cuts. At present there are six main domestic airlines Indian Airlines, Jet
Airways, SpiceJet, Kingfisher Airlines and the new entrant Indigo operating in India and their fare
structures differ drastically (e.g., the economy class fare from Delhi to Bangalore ranges between
Rs.12,600 (Indian Airlines) to Rs.4,400 (Indigo). In addition, there are a variety of fares charged by
most of these airlines the first-class fare, regular (unrestricted) economy fare, special discount fare
(often requiring the purchase of a ticket four weeks in advance. Although first-class service is not the
same as economy service the difference would not seem to warrant a price that is many times as higher.
Why do airlines set such fares?
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These fares provide a profitable form of price discrimination. The gains from discriminating are large
because different types of customers, with very different elasticities of demand, purchase these different
types of tickets.

It has been found that the demand for discounted fares is about two or three times as price elastic as first-
class or unrestricted coach service. Why the difference? While discounted tickets are usually used by
families and other leisure travelers, first-class and unrestricted coach tickets are more often bought by
business travelers, who have little choice about when they travel and whose companies pick up the tab.
Of course, these elasticities pertain to market demand, and with several airlines competing for
customers, the elasticities of demand for each airline will be larger. But the relative sizes of elasticities
across the three categories of service should be about the same. When elasticities of demand differ so
widely, it should not be surprising that airlines set such different fares for different categories of service.

Airlines price discrimination has become increasingly sophisticated. A wide variety of fares is available,
depending on how far in advance the ticket is bought and the percentage of the fare that is refundable if
the trip is changed or cancelled? The objective of the airlines has been to discriminate more finely
among travelers with different reservation prices. Of course, no airlines would want to sell a seat to a
guy for Rs.1800 when he is willing to pay Rs.3500. At the same time, an airline would rather sell a seat
for Rs.1800 than leave it empty.

Case Questions:

Q1 Explain the concept of price discrimination. What is the basis of price discrimination in airlines
industry?

Q2.Explain the necessary conditions for price discrimination to be possible along with degrees of price
discrimination. (10+10=20)

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