Business Economics
Assignment - A
1. “Economics can be defined as the study of allocation of scarce resources among competing ends.” Discuss.
2. Why does the demand curve have negative slope? What are the exceptions to the law of demand?
3. What is elasticity of supply? Discuss the determinants of elasticity of supply.
4. Make a comparative estimate between the returns to scale and economies of scale.
5. What are the features of perfect competition? Explain the long run equilibrium of a firm under perfect competition.
Assignment - B
1. What are the causes of business cycles? What measures should be taken to control recession in an economy?
2. Explain the usefulness of the concept of national income in analyzing the aggregate behaviour of the economy.
3. What factors give rise to monopoly? Why does a monopolist earn supernormal profits in the long run?
Case Study
Mc Donalds holds nearly 30 percent share of $65 billion US restaurant business and 46 percent of its $2.6 billion burger business. It serves more than 22 million customers per day and with sales of nearly $15 billion it dwarfs its competitors. After nearly three decades of double digit gains, however, domestic sales at Mc Donalds have been growing slowly since 1986 as a result of higher prices, changing tastes, slow growth of the domestic economy, demographic changes, and increased competition from other fast food chains and other forms of delivering fast foods.
Price increase at Mc Donalds exceeded inflation in each year since 1986 and in 0 of the last 17 years. The average check at McDonalds is now $4 a far cry from the 15cent hamburger on which Mc Donalds got rich and sent customers streaming to lower pricing customers. Concern over cholestrol and calories, as well as slowing down of growth of the economy and in personal incomes have also reduced growth. In addition the proportion of 15 to 29 year olds (the primary fast food consumers) in the total population has shrunk from 27.5 to 22.5 percent during the past decade. Increased competition from other fast food chains, and other fast food options (pizza, chicken tacos and so on) frozen fast foods, mobile units and the vending machines have also slowed the growth of Big Macs.
Mc Donalds did not sit idle and tried to meet its challenges head on by introducing a “value menu” in 1990 with small hamburgers selling for as little as 59 cents(down from 89 cents) and a combination of burger, French fries, and soft drinks for as much half as off. IN response to the increased public concern about cholestrol and calories, Mc Donalds began publicizing the nutritional content of its menu offerings, substituted vegetable oils for beef tallow in frying French fries, replaced ice cream with low fat yoghurt, introduced bran muffins and cereals in breakfast menu, and even (unsuccessfully) introduced Mac Lean Deluxe – a new reduced fat, quarter pound hamburger on which Mc Donalds spent from $50 to $70 to develop and promote. Furthermore, in response to increased competition from frozen foods, mobile units, and vending machines, an increasing number of Mc Donalds franchises have drive – throughs from which they now generate almost half their business. Mc Donalds is also expanding very rapidly abroad. When it faces much less competition and where there is much more room for growth.
Questions
1. How are sales of burgers related to determinants of demand?
2. What is “value Menu” ?
3. Do you think a decrease in price by 30 cents was a step in right direction?
Assignment - C
1. Microeconomic theory studies how a free enterprise economy determines
(a) prices of goods
(b) the prices of services
(c) the prices of economic resources
(d) all of the above
2. The intersection of the market demand and supply curves for a commodity determines
(a) the equilibrium price
(b) the equilibrium quantity
(c) the price at which there is neither a surplus nor a shortage of the commodity
(d) all of the above
3. The elasticity of demand is measured by
(a) the slope of the demand curve
(b) the increase of the slope of demand curve
(c) the percentage change in price for a given percentage change in quantity
(d) the percentage change in quantity for a given percentage change
in price
4. The demand curve for a commodity is more elastic
(a) the greater the number of good substitutes available
(b) the greater the proportion of income spent on he commodity
(c) longer the period of time considered
(d) all of the above
5. A complementary explanation of a downward sloping demand curve is given by
(a) diminishing returns
(b) diminishing marginal utility
(c) decreasing costs
(d) decreasing returns to scale
7. The interest paid by a firm to borrow money capital represents an
(a) explicit cost
(b) implicit cost
(c) opportunity cost
(d) all of the above
8. The wage that an entrepreneur would earn if he worked instead as a manager for someone else in best alternative employment represents
(a) profit
(b) explicit cost
(c) implicit cost
(d) opportunity cost
9. The law of diminishing return is
(a) Monetary relationship between inputs and outputs
(b) Short-run law
(c) Long-run law
(d) Questionable production relationship
10. The law of diminishing return begins to operate when the
(a) total product begins to rise
(b) total product begins to fall
(c) marginal product begins to rise
(d) marginal product begins to fall
11. When the law of diminishing return begins to operate, the TVC curve begins to
(a) fall at an increasing rate
(b) rise at a decreasing rate
(c) fall at a decreasing rate
(d) rise at an increasing rate
12. All of the cost curves are U-shaped except the
(a) AVC curve
(b) AFC curve
(c) AC curve
(d) MC curve
13. AFC equals the vertical distance between the
(a) AC curve and the AVC curve
(b) AC curve and the MC curve
(c) AVC curve and the MC curve
(d) All of the above
14. The MC schedule is obtained by subtracting successive values of
(a) TC
(b) TVC
(c) Either TC or TVC
(d) None of the above
15. A firm’s declining LAC curve over some ranges of output can be explained by
(a) diminishing return
(b) decreasing return to scale
(c) increasing return to scale
(d) increasing costs
16. The LAC curve shows the
(a) minimum cost of producing various levels of output within a particular plant
(b) minimum cost of producing various levels of output when plant size can be varied
(c) profit – maximising level of output
(d) change in TC of producing various levels of output when all inputs can be varied
17. If a firm doubles all inputs in the long run and total output less than doubles, we have a case of
(a) diminishing returns
(b) constant returns to scale
(c) increasing returns to scale
(d) decreasing returns
18. In perfect competition
(a) there are a large number of independent sellers, each too small to affect the commodity price
(b) the product of all firms is homogenous
(c) firms can easily enter or leave the industry
(d) all of the above
19. A firm maximizes its total profit when
(a) TC = TC
(b) TC exceeds TR by the greatest amount
(c) TR exceeds TC by the greatest amount
(d) It is at the break-even point
20. The demand curve faced by a perfectly competitive firm is
(a) negatively sloped
(b) positively sloped
(c) horizontal
(d) any of the above
21. MR for the perfectly competitive firm
(a) is equal to the change in TR per unit change in the quantity sold
(b) equals P
(c) is constant
(d) all of the above
22. In the marginal approach, the best level of output for a perfectly competitive firm is the output at which
(a) MR or P = rising MC
(b) MR or P = falling MC
(c) AC is lowest
(d) AVC is lowest
23. Pure monopoly may be based on
(a) increasing returns to scale
(b) control over the supply of raw materials
(c) patent or government franchise
(d) all of the above
24. In pure monopoly
(a) there is a single seller of a commodity for which there are no close substitutes
(b) there is a single seller of a commodity for which there are close substitutes
(c) there are few sellers of a commodity for which there are no close substitutes
(d) firms can enter or leave the industry in the long run without much difficulty
25. The demand curve facing the pure monopolist is
(a) negatively sloped
(b) horizontal
(c) positively sloped
(d) any of the above
26. Price discrimination involves changing different prices for a commodity
(a) for different quantities purchases
(b) to different classes of customers
(c) in different markets
(d) all of the above
27. Monopolistic competition refers to the form of market organization in which there are
(a) many sellers of a homogenous product
(b) many sellers of a differentiated product
(c) few sellers of a homogenous product
(d) few sellers of a differentiated product
28. The monopolistic competitor in the short run
(a) breaks even
(b) makes a profit
(c) incurs a loss
(d) any of the above
29. The kinked demand curve is used to rationalize
(a) collusion
(b) price competition
(c) price rigidity
(d) price leadership
30. In the long run, a monopolistic competitor
(a) incurs a loss
(b) breaks even
(c) makes a profit
(d) any of the above
31. Shut-down point is reached when
(a) price covers only AC
(b) price covers both AC and MC
(c) price covers MC but not AC
(d) price covers the minimum MC.
32. When income elasticity of demand for an essential commodity is less than unit, an increase in income leads to
(a) proportionate increase in demand
(b) less than proportionate increase in demand
(c) more than proportionate increase in demand
(d) no change in demand.
33. A firm reaches its optimum size in the long run when
(a) its total profit is maximum
(b) its LAC = LMC
(c) its MC = MR and AR = AC
(d) its total revenue is maximum
34. An individual demand curve shifts upward because of
(a) decrease in price
(b) increase in the number of buyers
(c) increase in consumer’s income
(d) Snob effect.
35. In the case of inferior good income elasticity of demand is
(a) Positive
(b) Zero
(c) Infinite
(d) negative
36. Net value-added is equal to
(a) payments accruing to factors of production
(b) compensation to employees
(c) wages plus rent interest
(d) value of output minus depreciation
37. Identify the item which is not a factor payment
(a) free uniform to defence personnel
(b) salaries and allowances to the members of Parliament
(c) Imputed rent of an owner-occupied building
(d) Scholarship given to scheduled caste students.
38. National income differs from net national product at market prices by the amount of
(a) current transfers from the rest of the world
(b) net indirect taxes
(c) national debt interest
(d) it does not differ
39. Net national product at factor cost is
(a) equal to national income
(b) more than national income
(c) less than than national income
(d) always more than gross national product.
40. Transfer payments refer to payments which are made
(a) without any exchange of goods and services
(b) to workers on transfer from one job to another
(c) as compensation to employees
(d) none of the above.
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Determinants of Elasticity of Supply