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MS-09

Management Programme

ASSIGNMENT SECOND SEMESTER 2012

MS-09: MANAGERIAL ECONOMICS

School of Management Studies INDIRA GANDHI NATIONAL OPEN UNIVERSITY MAIDAN GARHI, NEW DELHI – 110 068

ASSIGNMENT

Course Code Course Title Assignment Code Coverage

: : : :

MS- 09 Managerial Economics MS - 09/TMA/SEM-II/2012 All Blocks

Note: Answer all the questions and send them to the Coordinator of the Study Centre you are attached with. 1. “The relevance of Opportunity Costs is not limited to individual decisions but also to government’s decisions.” Explain giving examples.

2. “If we have two products, A and B, which are substitutes, we can expect that a rise in the price of A (or B) will cause the demand for B (or A) to go up.” Examine this statement with reference to other prices as determinants of demand. 3. Using the output - cost data of a pharmaceutical firm, the following total cost function was estimated using quadratic function: TC= 2018 - 6.63Q + 0.011Q2 i) Determine average and marginal cost functions. ii) Determine the output rate that will minimize average cost and the per unit cost at that rate of output. 4. Discuss the Equilibrium of a Firm under Monopoly. Illustrate using graphs. 5. Explain the difference between First and Third Degree Price Discrimination. 6. Write short notes on the following : a) Opportunity Set b) Substitutes c) Alternative Costs

1. “The relevance of Opportunity Costs is not limited to individual decisions but also to government’s decisions.” Explain giving examples. Ans: Opportunity costs’ relevance is not limited to individual decisions. Opportunity costs are also relevant to government’s decisions, which affect everyone in society. A common example is the guns-versus-butter debate. The resources that a society has are limited; therefore its decisions to use those resources to have more guns(more weapons) means that it must have less butter (fewer consumer goods). Thus when society decides to spend 100 crore on developing a defence system, the opportunity cost of that decision is 100 crores not spent on fighting drugs, helping the homeless, or paying off some of the national debt. For the country as a whole, the production possibility reflects opportunity costs. Figure 2.1 shows the Production Possibility Curve (PPC) reflecting the different combinations of goods, which an economy can produce, given its state of technology and total resources. It illustrates the menu of choices open to the economy. Let us take the example that the economy can produce only two goods,butter and guns. The economy can produce only guns, only butter or a combination of the two, illustrating the trade offs or choice inherent in such a decision. The opportunity cost of choosing guns over butter increases as the production of guns is increased. The reason is that some resources are relatively better suited to producing guns. The quantity of butter, which has to be sacrificed to produce an additional unit of guns, is called the opportunity cost of guns (in terms of butter). Due to the increasing opportunity cost of guns, the PPC curve will be concave to the origin. Increasing opportunity cost of guns means that to produce each additional unit of guns, more and more units of butter have to be sacrificed. The basis for increasing opportunity costs is the following assumptions: i) Some factors of production are more efficient in the production of butter and some more efficient in production of guns. This property of factors is called specificity. Thus specificity of factors of production causes increasing opportunity costs.

ii) The production of the goods require more of one factor than the other. For example, the production of guns may require more capital than that of butter. Hence, as more and more of capital is used in the manufacture of guns, the opportunity cost of guns is likely to increase. Let us assume that an economy is at point A where it uses all its resources in the...
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