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Class Test Questions and Answers

1. What is Managerial Economics? What is its relevance to Engineers/Managers?


Ans: Study of economic theories, logic and methodology for solving the practical
problems of business. It is used to analyze business problems for rational business
decisions. It is also called as Business Economics or Economics for firms.
Relevance to engineers/Managers:
Engineering and Management involves a lot of strategic decision making situations.
Managerial economics helps in rational decision making. The various economic concepts
help a manger to take right decisions. The scope of managerial economics is:
I. The selection of the production or the service to be produced.
II. The choice of production methods and resource combinations
III. The choice of best price and quantity combinations
IV. Promotional strategy and activities.
V. The selection of location from which to produce.

2. How will you arrive at a business decision? What is a business environment?


Ans: Managerial Decisions/ Decision Analysis is the Process of selecting the best out of
alternative opportunities, open to the firm.
To arrive at a business decision, the four main phases are:
1. Determine and define the objective.
2. Collection of information regarding economic, social, political and technological
environment and foreseeing the necessity and occasion for decision.
3. Inventing, developing and analyzing possible courses of action.
4. Selecting a particular course of action from the available alternatives.

Business environment comprises of the economic, social, political and technological


environment.

3. What are the basic economical concepts? Briefly explain with the applications.
Ans: The basic/fundamental economic concepts are:
i. Incremental concept
ii. Discounting concept
iii. Time perspective
iv. Opportunity cost
v. Equimarginal concept

Incremental analysis refers to changes in cost and revenue due to a policy change. For
example - adding a new business, buying new inputs, processing products, etc. Change in
output due to change in process, product or investment is considered as incremental
change. Incremental principle states that a decision is profitable if revenue increases more
than costs; and if costs reduce more than revenues.
Application: This concept is used while making a policy decision like adding a new
business, buying new inputs, processing products etc.
According to Discounting concept, if a decision affects costs and revenues in long-run,
all those costs and revenues must be discounted to present values before valid
comparison of alternatives is possible. This is essential because a rupee worth of money
at a future date is not worth a rupee today. Money actually has time value. Discounting
can be defined as a process used to transform/reduce future money into an equivalent
number of present money. For instance, Rs.100 invested today at 10% interest is
equivalent to Rs.110 next year.
FV = PV*(1+r) t
Where, FV is the future value (time at some future time), PV is the present value, r is the
discount (interest) rate, and t is the time between the future value and present value.

Application: This concept is used in investment decisions, loan transactions, selection of


projects etc.

According Time perspective, a manger/decision maker should give due emphasis, both to
Short-term and Long-term impact of his decisions, giving apt significance to the different
time periods before reaching any decision.

Application: Pricing decisions.

According to Opportunity cost principle, a firm can hire a factor of production if and
only if that factor earns a reward in that occupation/job equal or greater than its
opportunity cost. It is also defined as the cost of sacrificed alternatives. For instance, a
person chooses to forgo his present lucrative job which offers him Rs.50000 per month,
and organizes his own business. The opportunity cost is Rs. 50,000.

Application: Choice between alternative projects, Investment decisions.

Equimarginal concept refers to the marginal utility of a product. Marginal Utility is the
utility derived from the additional unit of a commodity consumed. The laws of equi-
marginal utility states that a consumer will reach the stage of equilibrium when the
marginal utilities of various commodities he consumes are equal. Also in resource
allocation to various activities, the marginal product of each resource added is
considered. An optimum resource allocation is said to be achieved when the value of
marginal product of each activity is the same.

Application: Resource allocation.


4. What are firms? Mention the Types, Objectives and goals of firms.
Firm is an organization owned by one or jointly by a few or many people, engaged in
a productive activity, with a definite aim.

Types of firms

BUSINESS

PRIVATE SECTOR JOINT SECTOR PUBLIC SECTOR

INDIVIDUAL OWNERSHIP COLLECTIVE OWNERSHIP DEPARTMENTAL STATUTORY GOVT. COMPANIES


ORGANIZATIONS CORPORATIONS

PARTNERSHIP

JOINT-HINDU FAMILY

JOINT STOCK COMPANIES

PUBLIC LIMITED
COMPANIES

PRIVATE LIMITED
COMPANIES

COOPERATIVES

1. Private sector:
The ownership is exclusively in the hands of private individuals.
a. Sole Proprietorship:
Owned and controlled by a single individual. Eg: retail trades, service industries, cottage
and small scale industries.
b. Partnership:
Owned, managed and controlled by more than one person. Profits are shared between
them. It is based on Indian Partnership Act. The minimum number of partners is 2 and the
maximum is 20.
c. Joint Hindu family business:
head of the family manages the business and other members help him. Profits are shared
according to their contribution.
d. Joint stock companies or corporation:
A legal entity with a perpetual succession and a common seal. It is created by law.
Public limited companies
Minimum of seven shareholder and the upper limit is open for any number. It has to
publish Balance sheet and Profit and Loss Account.
Cooperative society
People associated for common interest. Eg: consumer’s cooperative credit societies,
cooperative farming societies, housing cooperatives etc. Basic objective is to provide
maximum service to its members.
2. Public sector companies
They aim for the economic development of the country rather than profits.
Departmental organizations
Eg: Posts and telegraphs, railways, broadcasting and defense undertakings.
Public corporations
These are formed under specific acts of the parliament. eg: LIC, IFC, Indian Airlines etc.
Govt. Company
A company with not less than 50 percent of the share capital is owned by the central or
any state govts.
Eg: Hindustan Machine Tools Ltd., Hindustan steel Ltd. Etc.
3. Joint sector
Participation of both the govt. and the private sector in the business.
Madras Fertilizers Ltd. for example, was established as a joint enterprise in participation
with Amoco Inc. (USA) and National Iranian Oil Co.(Iran). The same foreign companies
were partners in Madras Refineries Ltd too. Maruti Udyog Ltd., is one of the latest cases
where a foreign private corporation has been invited to join hands with the Government.

Definition of Goals and Objectives

Goals – are long-term aims that you want to accomplish. Objectives – are concrete
attainments that can be achieved by following a certain number of steps. Goals and
objectives are often used interchangeably, but the main difference comes in their level of
concreteness. Objectives are very concrete, whereas goals are less structured.

Objectives of firms:
1. Profit maximization
2. Maximization of the sales revenue
3. Maximization of firm’s growth rate
4. Maximization of Managers utility function
5. Making satisfactory rate of Profit
Goals of firms:

1. Market share
2. Customer satisfaction
3. ROI(Return on Investment)
4. Technological advancement
5. Long run Survival of the firm
6. Entry-prevention and risk-avoidance
7. Social/ Environmental concerns.

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