IMT 20 Managerial Economics M1

IMT 20 Managerial Economics M1



1. Distinguish between the principles of marginalism and incrementalism with the help of
2. How is the price elasticity of demand measured? Explain the relationship between price
elasticity, average revenue and marginal revenue. Managerial Economics
3. Critically examine the law of diminishing marginal utility.
4. Why is an indifference curve for two normal goods convex to origin? Why cannot it be a
concave curve or a straight line?
5. Why is demand forecasting important? Explain the various types of survey methods of
forecasting demand and their usefulness.


1. Diagramatically explain the three stages of the law of diminishing marginal returns.
2. What are isoquants and isocost lines? Explain graphically
3. Distinguish between implicit cost and explicit cost with the help of example.
4. Graphically explain the relationship between change in output and AVC, AC and MC.
5. Describe the long run average cost (LAC) curve according to the modern cost theory.


1. Explain the Cyert-March Hypothesis of satisficing behavior.
2. Explain the profit maximizing conditions of a firm with the help of marginal revenue and
marginal cost.
3. Explain why does a perfectly competitive firm reaps normal profits in the long run.
4. What is price discrimination? How does a discriminating monopolist allocate his output in
different markets to charge different price.
5. Explain how price is determined under oligopoly under conditions of price leadership.


FOURTH SET OF ASSIGNMENTS Assignment-IV = 2.5 Each Case Study
Estimation of the Demand for Oranges by Market Experiment
Researchers at the University of Florida conducted a market experiment in Grand Rapids,
Michigan, to determine the price elasticity and the cross-price elasticity of demand for three types
of Valencia oranges: those from the Indian River district of Florida, those from the interior district of
Florida, and those from California. Grand Rapids was chosen as the site for the market
experiment because its size, demographic characteristics, and economic base were
representative of other midwestern markets for oranges.
Nine supermarkets participated in the experiment, which involved changing the price of the three
types of oranges, each day, for 31 consecutive days and recording the quantity sold of each
variety. The price changes ranged within ±16 cents in 4-cent increments, around the price of
oranges that prevailed in the market at the time of the study. More than 9,250 dozen oranges
were sold in the nine supermarkets during the 31 days of the experiment. Each of the participating
supermarkets was provided with an adequate supply of each type of orange so that supply Managerial Economics
effects could be ignored. The length of the experiment was also sufficiently short so
as to ensure no change in tastes, incomes, population, the rate of inflation, and determinants of
demand other than price. The results, summarized in the following table indicate that the price elasticity of demand for all
three types of oranges was fairly high (the boldface numbers in the main diagonal of the
For example, the price elasticity of demand for the Indian River oranges of -3.07 indicates
that a 1 percent increase in their price leads to a 3.07 percent decline in their quantity
demanded. More interestingly, the off-diagonal entries in the table, show that while the crossprice elasticities of demand between the two types of Florida oranges were larger than 1, they
were close to zero with respect to the California oranges. In other words, while consumers regarded the two types of Florida oranges as close substitutes, they did not view the California
oranges as such. In pricing their oranges, therefore, producers of each of the two Florida varieties
would have to carefully consider the price of the other (as consumers switch readily among them
as a result of price changes) but need not be much concerned about the price of California
Price Elasticity and Cross-Price Elasticity of Demand for Florida Indian River, Florida
Interior, and California Oranges
Price Elasticities and Cross-Price Elasticities
Type of Orange Florida Indian
Florida Interior California
Florida Indian River – 3.07 +1.56 +0.01
Florida Interior +1.16 – 3.01 +0.14
California +0.18 +0.09 – 2.76
(a) In light of the case define a test market? When should a firm take help of market experiments
to forecast demand?
(b) Suggest a suitable price policy for the three types of oranges.

A deodorant company manufactures and sells several types of deodorants which are branded as
‘Smell Fresh’. The company introduced five years ago, a new type of deodorant and its sales
increased rapidly. However, over the past two years, sales have been declining steadily even though
the market for deodorants has been expanding. Worried by the declining sales the company
conducted a survey of the market, which yielded the following information:
(i) Several new rivals have come up during the past five years, which manufacture and sell
almost similar deodorants.
(ii) Other companies have set prices lower than the prices of this company.
(iii) This company had initially set the price of its new brand at Rs 40, for which retailer pays
Rs 30, which was never changed.
(iv) The rival firms have set their prices at Rs 37.50, retailers paying Rs 25.
In view of these facts, the company decided to review the cost structure to find out whether the margin
to the retailers could be reduced to the level of the rival firms. The company finds that the variable
costs (including raw materials and labour) stands at Rs 15 per deodorant. At present the company
sells 4, 00,000 deodorants. As to the market prospects, if the price is reduced to Rs 35, the demand
would increase by 1,50,000 and if the price is reduced to Rs. 32.50, demand would increase to Managerial Economics
6,50,000 units. With such an increase in production, the firm could use its resources more fully. The
bulk of purchase of raw materials and more efficient use of labour would both help to reduce the unit
variable cost to Rs. 12.50.
(i) What price should the company charge to recapture market lost to rival firms?
(ii) Suggest alternative strategies that the company can adopt to counteract competition.

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