IMT 20 Managerial Economics M2

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IMT 20 Managerial Economics M2
PART– A
1. Explain the law of diminishing marginal utility.
2. Define income elasticity of demand. Explain the various degrees of income elasticity of
demand.
3. What is the relationship between TPL, APL, andMPL.
4. Why does the short run Average Variable Cost (AVC) curve and Average Cost (AC) curves
have a U- shape?
5. Does the traditional profit maximization model hold relevance in modern world? Why?
PART– B
1. Explain the concept of opportunity cost with the help of Production Possibility Curve.
2. Distinguish between a movement and a shift in supply.
3. Why is a normal Indifference Curve convex to origin?
4. Explain the phases of a business cycle.
5. What conditions should be fulfilled for the existence of a cartel? What is a centralised and
market sharing cartel?
PART– C
1. Diagrammatically explain how market equilibrium is achieved in case there is excess supply
and excess demand.
2. Is a monopolistic competitor a price maker? Why?
3. Define GDP, GNP, NDP and NNP. Distinguish between real and nominal National Income.
4. Describe the features of oligopoly market structure.
5. Briefly explain the various types of internal economies of scale.

CASE STUDY – I
The stock market is as close as we come today to a perfectly competitive market. In most cases the
price of a particular stock is determined by the market forces of demand and supply of the stock, and
individual buyers and sellers of the stock have an insignificant effect on price i.e., they are price
takers. All stocks within each category are more or less homogeneous. The fact that a stock is
bought and sold frequently is evidence that resources are mobile. Finally, information on prices and
quantities is readily available.
In general, the price of a stock reflects all the publicly known information about the present
and expected future profitability of the stock. This is known as the efficient market hypothesis. Funds
flow into stocks, and resources flow into uses in which the rate of return, corrected for risk, is highest.
Thus, stock prices provide the signals for the efficient allocation of investments in the economy.
Despite the fact that the stock market is close to being a perfectly competitive market, imperfections
occur even here. For example, the sale of $ 1 billion worth of stocks by IBM or any other large
corporation will certainly affect (depress) the price of its stocks.
Today, more and more Americans trade foreign stocks, and more and more foreigners trade
American stocks. This has been the result of a communication revolution that linked stock markets
around immense new earning possibilities and sharply increased opportunities for portfolio
diversification, it also creates the danger that a crisis in one market will very quickly spread to other
markets around the world. This actually happened when the New York Stock Exchange collapsed in
October 1987. In recent years, the New York Stock Exchange seems to have lost some of its former
ability to predict changing economic conditions and its importance as the central source of capital for
corporate America, as the latter borrowed increasing amounts from banks for takeovers and mergers.
Questions
1. Explain the features of a perfectly competitive market on the basis of the facts given in the case.
2. Diagrammatically explain how price and output decisions are taken under perfect competition.

CASE STUDY-II
Table below gives the price per kilowatt-hour (kWh) that Con Edison charged residential and
commercial users for various quantities of electricity consumed in New York city in 1995 during winter
and summer months. Con Edison charged different rates for different categories of customers (i.e.,
residential and commercial) and for different quantities of electricity purchased.
Electricity Rates Charged by Con Edison in 1995
(cents per kilowatt – hour)
RESIDENTAL RATES ( SINGLE RESIDENCE )
kWh Cents/kWh kWh Cents/kWh
Winter 0-250 13.07 Above 250 12.48
Summer 0-250 13.07 Above 250 13.98
COMMERCIAL RATES (SMALL BUSINESS)
Winter 0-900 14.91 Above 900 13.74
Summer 0-900 16.41 Above 900 15.24
COMMERCIAL RATES (LARGE BUSINESS)
Winter 0-15,000 5.60 Above 15,000 5.21
Summer 0-15,000 5.60 Above 15,000 5.21
Questions
1. What is price discrimination? Is price discrimination justified? Why?
2. Do you think Con Edison practiced price discrimination? Explain in view of three types of price
discrimination.

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