IMT-20: Managerial Economics

IMT - 20: MANAGERIAL ECONOMICS

PART - A

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Q1. Discuss the relationship between economics and management functions. How does the former contribute to the latter?

Q2. Explain the demand function with the help of examples. Draw appropriate graphs where required.

Q3. What do you understand by price elasticity of demand? Analyse the relationship between price elasticity and marginal revenue.

Q4. Discuss the Cardinal Utility Theory. How do the cardinalists derive the demand curve? What are its drawbacks?

Q5. What do you understand by indifference curves? How are they derived? Describe their properties.

PART - B

Q1.Explain the statistical methods of forecasting demand.

Q2. Discuss isoquant curves and isoquant maps.

Q3. Analyse the relationship between output and per unit costs in the short run.

Q4. What are the chief objectives that business firms seek to achieve that concern an economist?

Q5. What is meant by monopolistic competition? Explain and critically analyse Chamberlin's theory of monopolistic competition.

PART - C

Q1. What do you understand by duopoly? Explain Cournot's duopoly model.

Q2. Why is a perfectly competitive firm called a price taker and a monopolist a price maker?

Q3. Write a note on transfer pricing.

Q4. Define capital budgeting. Examine how the optimum level of capital is determined.

Q5. Discuss the methods of making investment decisions under conditions of risk.

CASE STUDY - 1

In 1997, over $700 billion purchases were charged on credit cards, and this total is increasing at a rate of over 10 per cent a year. At first glance, the credit card market would seem to be a rather concentrated industry. Visa, MasterCard and American Express are the most familiar names, and over 60 per cent of all charges are made using one of these three cards. But on closer examination, the industry seems to exhibit most characteristics of perfect competition. Consider first the size and distribution of buyers and sellers. Although Visa, Mastercard and American Express are the choices of the majority of consumers, these cards do not originate from just three firms. In fact, there are over six thousand enterprises (primarily banks and credit unions) in the US that offer charge cards to over 90 million credit card holders. One person's Visa card may have been issued by his company's credit union in Los Angeles, while a next door neighbour may have acquired hers from a Miami Bank when she was living in Florida.

Creditcards are a relatively homogenous product. Most Visa cards are similar in appearance, and they can all be used for the same purposes. When the charge is made, the merchant is unlikely to notice who it was that actually issued the card. Entry into and exit from the credit card market is easy as evidenced by the 6000 institutions that currently offer cards. Although a new firm might find it difficult to enter the market, a financially sound bank, even one of modest size, could obtain the right to offer a MasterCard or a Visa card from the present companies with little difficulty. If the bank wanted to leave the field, there would be a ready market to sell its accounts to other credit card suppliers. Thus, it would seem that the credit card industry meets most of the characteristics for a perfectly competitive market.

Questions:

1. What are the characteristics of perfect competition that are exhibited by the credit card industry?

2. Discuss the price and output condition of a perfect competition.

3. Do you think the same competitive state is applicable to the Indian scenario?

CASE STUDY - 2

The past fifteen years have seen numerous mergers of banks in every part of the US. Invariably, bank managers point to significant cost reduction (increasing returns to scale) associated with consolidation of computer systems, combining neighbouring branch outlets and reduction of corporate overhead expenses as justification. Many of these mergers involved multibillion dollar banks, which appeared to be inconsistent with existing empirical research on bank costs that showed significant diseconomies of scale for banks with more than $25-50 million in deposits. Unfortunately, these studies used data only for banks with less than $1 billion in deposits. In a more recent study, Sherrill Shaffer and Edmond David used data for large banks ( those with $2.5 to $121 billion in deposits) and found increasing returns to scale (i.e., declining per unit costs) up to a bank size of $15 to $37 billion. Clearly, the owners and managers of the merged banks knew more about their actual cost functions than did the earlier economic analysts. The consistent pattern of mergers of banks much larger than $24 to $50 million in deposits was strong evidence that the existing research was incorrect.

Questions:

1. How can mergers in the banking industry result in economies of scale (cost reduction)?

2. Do you think the same factors can lead to economies of scale in the banking sector in India?

3. What are the other factors that can lead to economies of scale in the banking sector?

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