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MCO-21: Managerial Economics

MCO-21: Managerial Economics

IGNOU Solved Assignment Solution for 2022-23

If you are looking for MCO-21 IGNOU Solved Assignment solution for the subject Managerial Economics, you have come to the right place. MCO-21 solution on this page applies to 2022-23 session students studying in MCOMMAFS, MCOM courses of IGNOU.

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Assignment Code: MCO-021/TMA/2022

Course Code: MCO-021

Assignment Name: Managerial Economics

Year: 2022

Verification Status: Verified by Professor


1.“The Equi-Marginal Principle can be applied to both consumption as well as production.” Discuss this statement with the help of an example.(20)

Ans) According to this theory, different steps should be done until each route provides an equal marginal benefit in relation to its cost. The statement that a The decision-maker would employ or organise his resources in such a way as to maximise returns while minimising the marginal costs of various applications of a given resource or of several resources when put to the same use. For instance, a consumer who wants to obtain the most enjoyment out of his consumption expenditure on the goods and services that best suit his needs.


𝑀𝑈1/𝑀𝐶1 = 𝑀𝑈2/𝑀𝐶2= ………= 𝑀𝑈n/𝑀𝐶n

Where 𝑀𝑈1 = marginal utility from good one,

𝑀𝐶1 = marginal cost of good one and so on,


A factory that wants to maximise its profits would implement a manufacturing strategy that would guarantee


𝑀𝑅𝑃1/𝑀𝐶1 = 𝑀𝑅𝑃2/𝑀𝐶2= ………𝑀𝑅𝑃n/𝑀𝐶n


Where 𝑀𝑅𝑃1= Marginal revenue product of input one (e.g., Labour), 𝑀𝐶1= Marginal cost of input one and so on.


It is simple to understand that the decision-makers might increase his utility/profit by rearranging his resources/input if the aforementioned equation was not met. e.g., if 𝑀𝑈1/𝑀𝐶1 > 𝑀𝑈2/𝑀𝐶2 the consumer would add to his utility by buying more of good one and less of good two. This rule is summarised in the table for various sellers.


Example: A multi-commodity consumer wants to buy increasing quantities of commodities A, B, and C. The consumer is required to purchase a combination including all three things because the cost of each unit is the same. Due to his limited purchasing power, he is only able to purchase a total of six units. Once more, he is a victim of declining marginal utility, meaning that when he possesses more of something, he wants to use it less.

In the real world, equi-incrementalism frequently needs to take the place of the concept of equi-marginalism. This is due to the fact that changes in the actual world are often lumpy or discrete, making the concept of marginal change not always applicable. However, the decision rule or optimal principle won't alter; only little, gradual changes will be made in its place.


2.(a) Explain the demand function for a particular product.(10)

Ans) The variables that are thought to affect the demand for a given product are listed by the demand function. Numerous variables, not always the same for every one of them, may influence the demand for certain items. This section presents a generic demand function that takes into account some of the most prevalent factors that influence demand. Some of these might not, however, be applicable for any specific product.


As a result, any attempt by the company to forecast demand for a product using the demand function will necessitate some preliminary information, or at the very least, educated speculation, about the forces that are likely to have an impact. The demand function is expressed as follows:


Qd = f (Po, Pc, Ps, Yd, T, A, CR, R, E, N, 0)


The function's first three parameters are related to cost. They are, respectively, the product's own price (Po), the price of complements (Pc), and the price of replacements (Ps). In the case of a good's own price, the expected relationship would be that demand decreases as price increases and increases as price decreases.


The term "disposable income," or "the amount of money that people have available to spend," denotes the fourth variable in the demand function. More people will be able to purchase goods because of rising disposable income levels, which will increase demand for the majority of goods. This naturally presupposes that they are "regular" items, whose purchases rise with rising income levels as opposed to "inferior" commodities, whose purchases fall as wealth rises. Of course, how that money is spent will determine how changes in disposable income affect the demand for specific goods. This is the crucial point where the fifth variable, tastes (T), must be considered. Although a variety of factors may play a role, tastes might vary dramatically over time.


The following collection of variables, the A variable, is related to levels of advertising and represents the intensity of own product advertising, the intensity of advertising for replacements, and the intensity of advertising for complements. Expectations are represented by the letter E in the demand function. Expectations on changes in income and prices may be included in this. CR and Rare were associated variables as well. While the latter indicates the interest rate, or the cost of credit, the former stands for the availability of credit.


The importance of these factors will be greatest when purchasing consumer durable goods, The term "N" refers to the quantity of potential clients. There is probably a target market for every product, whose size will differ. Age or geographic location may have an impact on the quantity of potential customers. For instance, the quantity and variety of toys sold in a given nation will depend on its demographic makeup, in this case, the number and age of children living there. Finally, we reach 0, which stands for any other random elements that might affect the demand for a specific product.


(b) Differentiate between individual and market demand curve. (10)

Ans) In economics, demand is the desire for the commodity supported by the willingness of the consumer to spend money to buy that commodity and the ability of the consumer to get the commodity.


Demand Curve: On a graph, one can draw the demand curve for any commodity by plotting the various combinations of price and demand, wherein price will be an independent variable and is taken on Y-axis, whereas quantity demanded will be a dependent variable which is plotted on X-axis.


3.“An analytical tool frequently employed by managerial economists is the break-even chart which is an important application of cost functions.” Explain this statement.(20)

Ans) An analytical tool frequently employed by managerial economists is the breakeven chart, an

important application of cost functions. The breakeven chart illustrates at what level of output in

the short run, the total revenue just covers total costs. Generally, a breakeven chart assumes that

the firm’s average variable costs are constant in the relevant output range; hence, the firm’s total

cost function is assumed to be a straight line. Since variable cost is constant, the marginal cost is

also, constant and equals to average variable cost.


Here, it is assumed that the price of the product will not be affected by the quantity of sales. Therefore, the total revenue is proportional to output. Consequently, the total revenue curve is a straight line through the origin. The firm’s fixed cost is ₹500, variable cost per unit is ₹4 and the unit sales price of output is ₹5. The break-even chart, which combines the total cost function and the total revenue curve, shows profit or loss resulting from each sales. if the firm sells 200 units of output it will make a loss of ₹300. The chart also shows the breakeven point, the output level that must be reached if the firm is to avoid losses. The breakeven point is 500 units of output. Beyond 500 units of output the firm makes profit.


Breakeven charts are used extensively for managerial decision process. Under right conditions,

breakeven charts can produce useful projections of the effect of the output rate on costs, revenue

and profits. For example, a firm may use breakeven chart to determine the effect of projected

decline in sales or profits.


On the other hand, the firm may use it to determine how many units

of a particular product it must sell in order to breakeven or to make a particular level of profit.

However, breakeven charts must be used with caution, since the assumptions underlying them,

sometimes, may not be appropriate. If the product price is highly variable or if costs are difficult

to predict, the estimated total cost function and revenue curves may be subject to these errors.

We can analyse the breakeven output with familiar algebraic equations.


TR = P * Q


At breakeven point, TR = TC

P * Q = TFC + (AVC *Q)

Q TFC/P-AVC=Total Fixed cost/Price-Variable cost per unit


Here Q stands for breakeven volume of output. Multiplying Q with price (P) we get the breakeven value of output. In the case of our example given in Figure 8.4, TFC = ₹500, P = ₹5 and AVC = ₹4. Consequently,




Therefore, the breakeven output (Q) will be 500 units. Similarly, the breakeven output value will be ₹2500 (P * Q = ₹5 * 500).


4.Oligopoly is the most prevalent form of market structure in the manufacturing sector. Explain with the help of an example.(20)

Ans) The term "oligopoly" refers to a type of market organisation where there are few vendors of a uniform or differentiating good. We have a duopoly if there are just two sellers. In the case of a homogeneous product, oligopoly is pure. We have a differentiated oligopoly if the product is distinct. It is not simple to enter an oligopolistic market, but it is doable.


The most common type of market organisation in the industrial sector of most countries, including India, is oligopoly. Automobiles, primary aluminium, steel, electrical equipment, glass, breakfast cereals, cigarettes, and many more are oligopolistic sectors in India. While some of these products are differentiated, others are homogeneous. When transportation costs restrict the market's size, oligopoly also exists. For instance, competition is restricted to the few regional producers in a given area, despite the fact that India has a large number of cement makers.


Due to the small number of companies selling in oligopolistic markets with homogeneous or differentiated production, each company's actions have an impact on the other companies in the sector and vice versa. For instance, Ford and Maruti quickly responded with their own price rebates after General Motors introduced them in the sale of its cars. Furthermore, oligopolists typically prefer to compete on the basis of product differentiation, promotion, and service because price competition can result in disastrous price wars. These are known as non-price competitive situations. But even here, Ford and Maruti are expected to quickly counter if GM launches a significant advertising effort. Early in the 1980s, Pepsi launched a sizable advertising effort, to which Coca-Cola in the US responded by launching a sizable advertising campaign of its own.


From what has been discussed, it is evident that the interdependent rivalry amongst companies in the industry is what makes oligopoly unique. This is the inevitable outcome of rarity. Each oligopolist must take into account the potential response of rivals when deciding its pricing policies, the level of product differentiation to introduce, the level of advertising to be undertaken, the amount of service to provide, etc. This is because each oligopolist is aware that its own actions will have a significant impact on the other oligopolists in the industry.


We have multiple oligopoly models, each based on the unique behavioural responses of competitors to the acts of the first, because competitors can react in a variety of ways. Because of this dependency, management decision-making in an oligopoly is significantly more complicated than it is in other market structures. The most significant oligopoly models are presented in the section that follows. But we must remember that each model is, at most, incomplete.


In general, oligopoly derives from the same sources as monopoly. As a result, only a few companies may supply the entire market due to economies of scale operating over a sufficiently wide range of outputs; huge capital investments and specialised inputs are typically needed to enter an oligopolistic industry, which serves as a significant natural barrier to entry; a small number of companies may hold a patent for the exclusive right to produce a good or to use a specific production process; and established firms may have a devoted following of custodians.

The aforementioned factors not only contribute to oligopoly but also act as long-term roadblocks for other businesses looking to enter the market. The industry could not last as an oligopoly if entrance were not so constrained. Limit pricing, whereby current businesses charge a price low enough to deter entrance into the industry, creates an additional barrier to entry. They voluntarily give up short-term revenues in order to increase long-term profits by doing this.


Oligopolies can be categorised according on the kind of product they create, as was previously discussed. They may be distinct or homogeneous. Television, vehicles, etc. fall under heterogeneous oligopoly while steel, aluminium, etc. are homogeneous oligopolies. The kind of product produced may have an impact on how oligopolists act strategically.


According to economists, there are two types of oligopolist behaviour that are in contradiction to one another: cooperative oligopolists, which follow the pattern set by competitor companies, and non-cooperative oligopolists, which do not. If one company, for instance, increases the price of its product, other companies may choose to keep their prices low in an effort to entice customers away from the higher-priced company. However, as was already mentioned, pricing is not the sole aspect of competition. Advertising, product quality, and other marketing tactics are actually additional aspects on which the businesses compete.


5.Write short notes on the following: (20)


(a) Price Discrimination

Ans) Price discrimination is frequently referred to as monopolistic price discrimination in economic parlance. This description is accurate since price discrimination is impossible in an equilibrium, fully competitive market. Price discrimination cannot exist in a market with monopoly power. When you consider the notion of price discrimination—the act of charging different prices to different consumers for the same good—this issue appears to be unimportant. Consumers would simply purchase goods from the lowest sellers in a competitive market, and producers would sell their goods to the highest bidders, and that would be the end of it.


However, when a company has monopoly power, it may be able to offer various terms to various customers, dividing the market—a process known as market segmentation. The practise of charging various prices for the same product by a monopoly corporation is known as price discrimination. Because it has the ability to regulate pricing by adjusting its output, the monopolistic firm is able to discriminate between various customers by charging them various prices. Since there are no close substitutes for its product, customers have little choice but to purchase from it.

First Degree Price Discrimination, Second Degree Price Discrimination, and Third Degree Price Discrimination are the three different types of price discrimination. First-degree price discrimination occurs when a monopolist sets different prices for various units of production based on the consumer's willingness to pay. For instance, a surgeon who is the only super specialist in the area may charge various patients different fees depending on their ability to pay. Second-degree price discrimination occurs when a monopolist sets different prices for various quantities of the same good.


(b) Bundling

Ans) Bundling occurs when products or services that may be sold separately are offered as a package. It is the practise of selling two or more distinct products together for a single price.


The following is a codification of bundling procedures and descriptions of selling tactics:


  1. Pure bundling: Products can only be purchased in bundles.

  2. Mixed-bundling: Products are offered as bundles and separately.

  3. Tying: The purchase of another goods, typically an additional complimentary product, is necessary in order to acquire the primary product.


Although not comprehensive, this list does include the most typical situations. Selling two products only as a package rather than separately is known as pure bundling.


For instance, Microsoft Office 365 is a collection of numerous programmes, including Word, Excel, Access, PowerPoint, Outlook, OneNote, and others. These applications must be purchased in a bundle; you cannot purchase them separately. Because some apps are more in demand than others, Microsoft has adopted this strategy.


Financial bundling is now commonplace. For many businesses, manufacturing is now the lowest-profit link in the chain. To put it another way, give away the product and profit on the financing that comes with it. Numerous automakers are offering financing and pairing the vehicle with loans in India as well. Consumers may benefit from bundling. It can lower the producer's distribution expenses as well as "search costs." "Transaction costs" are lower.


Additionally, the producer may be a more effective bundler than the consumer because few people opt to purchase the various components of a computer in order to assemble them themselves. Bundling should only take place in perfectly competitive markets if it is more cost-effective than selling the products individually.


(c) Time-series analysis

Ans) Quantifying associations between variables can be done using regression analysis, as previously mentioned. However, if the regression model has a lot of independent variables, data gathering could be challenging. Time-series analysis is an alternate technique for predicting future values when variations in a variable exhibit discernible patterns across time.  Finding the elements of data change is the main goal of time-series analysis.


These parts are often categorised into four groups:

  1. Trend.

  2. Seasonality.

  3. Circular patterns.

  4. Fluctuation at random.


A long-term rise or fall in the variable is referred to be a trend. For instance, although the trend for endangered animals, like the tiger, is negative, India's population time series shows an upward tendency. Changes that come along on a predictable schedule are represented by the seasonal component. Seasonality can be seen in the spike in umbrella sales that occurs during the rainy season.


A time series' analysis may indicate the existence of cyclical patterns, which are characterised as extended intervals of high values followed by low values. This category includes business cycles. Finally, random fluctuations are responsible for the remaining variance in a variable that does not exhibit any discernible pattern. Time-series data can be analysed using a variety of techniques to identify trends, seasonality, and other cyclical patterns. However, variations in the variable brought on by random events are by definition unpredictable.

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