Business Economics Question Paper

Topics: Costs, Supply and demand, Marginal cost Pages: 31 (8835 words) Published: August 17, 2013

Date: 23 September 2004
Time: 9.30 am to 12.30 amMaximum marks: 60

Instructions: Attempt any three questions out of four. All questions carry equal marks. Start each answer on a fresh page. Parts of the question must be answered together. Use appropriate tables, diagrams, equations to support your answers. Assume suitable assumption wherever necessary.

Q 1(a) Mrs. Palekar has Rs 1 million, which she must allocate between Indian government securities and common stocks. If she invests it all in the Indian government securities, she will receive a return of 5%, and there is no risk. If she invests it all in common stock, she expects to receive a return of 10%, and there is a considerable risk. If she invests half in Indian government securities and half in common stocks, she expects to receive a return of 7.5%, and there is some risk. Investors differ in how much risk they will accept in order to obtain a higher expected return i) Capture this situation in the indifference curve diagram and show that the positively sloped indifference curves (unusual) reflect the satisfaction levels of an investor from expected return and extent of risk from all possible allocations of Rs 1 million between these two types of securities. ii) Why do these indifference curves and constraint slope upward to the right? How should this investor allocate Rs 1 million between Indian government securities and common stocks? 5

Q 1(b) Sleek Furniture produces 1,000 wood cabinets and 500 wood desks per year, the total cost being Rs 15,000. If the firm produced 1,000 wood cabinets only, the cost would be Rs 12,000. If the firm produced 500 wood desks only, the cost would be Rs 8,000. i) Calculate the degree of economies of scope.

ii) Why do economies of scope exist and what is their significance in managerial decision-making? 5
Q 1(c) In late 1991, two firms, Delta Airlines and the Trump Shuttle, provided air shuttle service between New York and Boston or Washington. The one-way price charged by both firms was $142 on weekdays and $92 on weekends, with lower off-peak advance-purchase fares. In September 1991, Delta increased the per-trip shuttle mileage given to members of the Delta frequent-flier program from 1,000 to 2,000 miles, even though actual mileage from New York to either Boston or Washington is about 200 miles. Moreover, Delta also offered an extra 1,000 miles to frequent fliers who made a round trip on the same day, raising a possible day’s total to 5,000 miles. Almost simultaneously, Trump changed the frequent-flier mileage it gave to shuttle passengers. It also participated in the One Pass frequent flier program with Continental Airlines and some foreign carriers. i) In what model of the market these two airlines are working and why? ii) Whether Trump took the right decision or not?

iii) What alternative pricing strategies you can suggest and why? 10
Q 2(a) Managers must continually make comparisons among alternative systems of production. Should another replace one type of plant? How does your plant stack up against your competitor’s? Breakeven Analysis can be extended to help make such comparisons more effective. The following are two situations you need to choose from:

|Situation A |Situation B | |Price = 15 |Price = 15 | |AVC = 10 |AVC = 5 | |TFC = 1,000 |TFC = 4,000 | |Output |Profit in A situation |Profit in B situation | |2,000 |5,000 |5,000...
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