Question 1

In managerial economics, what does the term marginal refer to?

Accepted Answer

B. Incremental

Explanation: Marginal in managerial economics refers to incremental changes or additions.

Question 2

Which of the following is an example of a fixed cost in a manufacturing company?

Accepted Answer

C. Rent for the factory building

Explanation: Rent for the factory building is a fixed cost because it does not vary with the level of production.

Question 3

In perfect competition, a firm is a:

Accepted Answer

Competitive firm accepts the market-determined price.

Question 4

Contribution is:

Accepted Answer

Contribution helps cover fixed cost and profit.

Question 5

If fixed cost increases, BEP (units) will:

Accepted Answer

Higher fixed cost requires more contribution to break even.

Question 6

What is the primary function of a production possibility curve (PPC)?

Accepted Answer

D. To display the production capabilities of a country

Explanation: A production possibility curve (PPC) shows the various combinations of two goods that a country can produce given its resources and technology.

Question 7

Expected Monetary Value (EMV) is used mainly for decisions under:

Accepted Answer

EMV uses probabilities, so it applies under risk.

Question 8

A monopolist's demand curve is:

Accepted Answer

Monopolist faces market demand which is downward sloping.

Question 9

A companys total cost (TC) is $10,000, and it produces 1,000 units of a product. What is the average cost per unit?

Accepted Answer

B. $10

Explanation: Average cost per unit is calculated as Total Cost (TC) divided by the number of units produced.

Question 10

The law of demand states that (ceteris paribus):

Accepted Answer

Other things equal, price and quantity demanded are inversely related.

Question 11

Which of the following is an example of an implicit cost for a business?

Accepted Answer

D. The owners foregone salary

Explanation: An implicit cost is an opportunity cost that involves the owners foregone salary or any other resource the owner contributes without a direct payment.

Question 12

Fiscal policy mainly relates to:

Accepted Answer

Fiscal policy = taxation + public expenditure.

Question 13

Capital budgeting uses mainly:

Accepted Answer

Decisions are based on cash inflows/outflows.

Question 14

What does the term ceteris paribus mean in economics?

Accepted Answer

A. All else being equal or holding other factors constant

Explanation: Ceteris paribus is used in economics to isolate the impact of a specific variable while holding all other relevant factors constant

Question 15

In marginal cost pricing, the price is mainly based on:

Accepted Answer

Marginal pricing focuses on variable/marginal cost and contribution.

Question 16

PESTLE framework is used to analyse:

Accepted Answer

PESTLE covers political, economic, social, technological, legal, environmental factors.

Question 17

Which factor generally makes demand more elastic?

Accepted Answer

More substitutes make consumers more price sensitive.

Question 18

What is the primary focus of the supply side in economics?

Accepted Answer

C. Determining the quantity of goods and services firms are willing to produce and sell

Explanation: The supply side in economics focuses on the quantity of goods and services that firms are willing to produce and sell.

Question 19

What is the primary goal of managerial economics?

Accepted Answer

A. Maximising profits

Explanation: The primary goal of managerial economics is to maximise profits.

Question 20

Inflation generally causes:

Accepted Answer

Inflation raises input prices and may reduce real demand.

Question 21

What is meant by ceteris paribus?

Accepted Answer

Ceteris paribus means other factors remaining the same.

Question 22

What is regulation?

Accepted Answer

**Regulation** means government rules and controls that guide business behaviour (quality, safety, labour, environment, etc.).

Question 23

Define NPV.

Accepted Answer

**NPV** is **PV of cash inflows − PV of cash outflows (initial investment)**.

Question 24

Write the formula for expected value (EV).

Accepted Answer

**EV = Σ (Outcome × Probability)**.

Question 25

Define uncertainty.

Accepted Answer

**Uncertainty** is a situation where outcomes are uncertain and **probabilities are not known reliably**.

Question 26

What is sensitivity analysis?

Accepted Answer

**Sensitivity analysis** studies how results change when **one assumption/variable** is changed at a time.

Question 27

What is marginal cost pricing?

Accepted Answer

Marginal cost pricing sets price based primarily on variable/marginal cost, focusing on contribution.

Question 28

What is penetration pricing?

Accepted Answer

Penetration pricing is charging a low initial price to enter a market and quickly gain market share.

Question 29

What is CVP analysis?

Accepted Answer

**CVP analysis** studies the relationship among **Cost, Volume and Profit** to support planning decisions.

Question 30

Write the profit maximisation condition.

Accepted Answer

A firm maximises profit where MR = MC (with MC rising).

Question 31

Explain pricing objectives (any five).

Accepted Answer

Pricing objectives (any five):
1) Profit maximisation (short/long run).
2) Sales maximisation (increase volume).
3) Market share/growth (penetration strategy).
4) Survival during recession (cover variable costs).
5) Price stability (avoid frequent price changes).
6) Quality/brand image (premium pricing).

Firms often use multiple objectives depending on market situation.

Question 32

Explain the degrees/types of price elasticity of demand.

Accepted Answer

Degrees/types of price elasticity (based on |Ep|):
1) Perfectly inelastic (Ep=0): quantity does not change with price.
2) Relatively inelastic (Ep<1): small response to price changes.
3) Unitary elastic (Ep=1): %ΔQ = %ΔP.
4) Relatively elastic (Ep>1): quantity responds strongly.
5) Perfectly elastic (Ep=∞): very small price change leads to large demand change (theoretical).

These categories help in pricing decisions.

Question 33

Explain decision tree and rollback method (brief).

Accepted Answer

A **decision tree** shows decisions and chance events step-by-step.

**Rollback method:** compute expected values from the end branches backward by multiplying payoffs with probabilities and adding them at chance nodes, then choose the best branch at decision node.

It is useful for multi-stage decisions under risk.

Question 34

Explain the nature of managerial economics (any three features).

Accepted Answer

Nature/features of managerial economics (any three):
1) Pragmatic and decision-oriented: focuses on real business decisions.
2) Micro-based: uses microeconomic concepts like demand, costs, pricing and market structure.
3) Interdisciplinary: linked with accounting, finance, statistics and marketing.

It is also forward-looking because managers plan for future conditions.

Question 35

Explain criteria used to classify market structures.

Accepted Answer

Market structures are classified based on: (1) number of firms (sellers) and buyers, (2) nature of product (homogeneous or differentiated), (3) conditions of entry and exit (barriers), and (4) degree of control over price and information.

These criteria determine how competitive the market is and how much pricing power firms have.

Question 36

Explain demand analysis and the law of demand. Include assumptions, exceptions and managerial importance.

Accepted Answer

Demand analysis studies the behaviour of consumers and the factors that determine the quantity of a product demanded. It helps managers estimate how demand will respond to changes in price, income, tastes, substitutes, complements and advertising.

Law of demand (statement): Other things remaining constant (ceteris paribus), quantity demanded varies inversely with price—when price falls demand rises, and when price rises demand falls.

Assumptions (ceteris paribus conditions):
1) Income of consumers remains constant.
2) Tastes and preferences do not change.
3) Prices of related goods (substitutes/complements) remain constant.
4) No change in expectations and quality.

Exceptions (any three with examples):
1) Veblen/prestige goods: higher price may increase demand due to status (designer products).
2) Giffen goods (rare): demand may rise with price for very inferior goods in special cases.
3) Expectations: if price is expected to increase further, people buy more now even at higher current price.
4) Necessities: demand may not fall much when price rises.

Managerial importance:
- Pricing decisions: understanding how price changes affect sales.
- Production/inventory planning: aligning output with expected demand.
- Marketing strategy: deciding promotion and segmentation based on demand factors.

Thus, demand analysis and the law of demand provide a base for rational business decisions.

Question 37

Explain EMV method with formula, steps and a simple example. Mention one limitation.

Accepted Answer

### **Expected Monetary Value (EMV)**
**EMV** is the weighted average of possible monetary outcomes using probabilities.

**Formula:**
- **EMV = Σ (Payoff × Probability)**

### Steps (flow)
```text
List alternatives → list outcomes + probabilities → compute EMV for each
→ choose highest EMV (risk-neutral)
```

### Simple example
Suppose Alternative A gives profit ₹1,00,000 with p=0.6 and loss ₹20,000 with p=0.4.
- **EMV(A) = 1,00,000×0.6 + (-20,000)×0.4 = 60,000 − 8,000 = ₹52,000**

### Limitation
EMV is an **average** and may ignore **variability** and worst-case outcomes, so risk attitude matters.

Question 38

Explain price-output determination under monopoly. Include AR-MR relationship and steps of equilibrium.

Accepted Answer

Monopoly is a market with a single seller and no close substitutes, protected by barriers to entry. The monopolist faces the market demand curve.

Revenue relationship:
- AR (demand) curve is downward sloping.
- MR lies below AR because to sell additional units, the monopolist must reduce price on all units (for a single price market).

Equilibrium/price-output determination steps:
1) Find the output level where MR = MC (and MC is rising). This gives equilibrium output (Q*).
2) Determine price (P*) from the AR (demand) curve corresponding to Q*.
3) Profit depends on comparison of P* with AC at Q*. If P* > AC, the monopolist earns supernormal profit.

Important points:
- Unlike perfect competition, price is not equal to MR under monopoly.
- Monopoly can maintain profit in long run because entry is blocked.
- Monopoly has no supply curve because price-output pair depends on demand and MC conditions.

Thus, monopoly sets output first (MR=MC) and then charges the price from demand curve.

Question 39

Explain capital budgeting and its importance. Also write the steps of capital budgeting process (flow).

Accepted Answer

**Capital budgeting** is the process of evaluating and selecting **long-term investment projects** such as new plant, machinery, expansion and replacement.

### **Importance** (why it matters)
- Involves **large funds** and long-term commitment.
- Projects generate cash flows over many years, so **risk/uncertainty** is high.
- Wrong decisions are often **irreversible** and cause heavy losses.

### **Basic capital budgeting process** (flow)
```text
Identify project → Estimate cash flows → Choose discount rate (cost of capital)
→ Evaluate (NPV/IRR/Payback) → Select/Reject → Implement & Review
```

Thus, firms use capital budgeting to achieve **profitability and growth** in the long run.

Question 40

Solve a CVP-style problem: FC=₹50,000; SP=₹100; VC=₹60. Find BEP units, BEP sales, MOS for 2,000 units, and required units for ₹20,000 profit.

Accepted Answer

Given:
- **FC = ₹50,000**
- **SP = ₹100**
- **VC = ₹60**

### Step 1: Compute contribution
- **Contribution/unit (C)** = **SP − VC** = 100 − 60 = **₹40**

### Step 2: BEP (units)
- **BEP (units)** = **FC / C** = 50,000 / 40 = **1,250 units**

### Step 3: BEP (sales value)
- **BEP sales** = **BEP units × SP** = 1,250 × 100 = **₹1,25,000**

### Step 4: MOS at 2,000 units
- Actual sales (units) = **2,000**
- **MOS (units)** = 2,000 − 1,250 = **750 units**
- Actual sales (₹) = 2,000 × 100 = **₹2,00,000**
- BE sales (₹) = **₹1,25,000**
- **MOS (₹)** = 2,00,000 − 1,25,000 = **₹75,000**

### Step 5: Units for target profit ₹20,000
At target profit:
- Required units = (FC + Profit) / C
- = (50,000 + 20,000) / 40 = 70,000/40 = **1,750 units**

```text
Flow: FC, SP, VC → Contribution → BEP → MOS/Target profit
```

Final answers: **BEP=1,250 units**, **BEP sales=₹1,25,000**, **MOS=750 units (₹75,000)**, **Target profit units=1,750**.

Managerial Economics — Question Paper

20 more questions to unlock