Question 1

Monetary policy primarily affects:

Accepted Answer

Monetary policy impacts rates, credit and liquidity.

Question 2

For price discrimination, one necessary condition is:

Accepted Answer

Segmentation and preventing resale are required.

Question 3

Demand means:

Accepted Answer

Demand requires desire plus purchasing power and willingness.

Question 4

Time value of money means:

Accepted Answer

Money today can earn interest, so it is more valuable.

Question 5

Marginal product (MP) is:

Accepted Answer

MP is the additional output from one more unit of input.

Question 6

CVP analysis studies the relationship among:

Accepted Answer

CVP = Cost–Volume–Profit analysis.

Question 7

A demand function shows relation between:

Accepted Answer

Demand function relates quantity demanded to price, income, substitutes, etc.

Question 8

Cost-plus pricing is criticised because it:

Accepted Answer

Cost-plus may set wrong prices if demand/competition not considered.

Question 9

Degree of operating leverage (basic) is:

Accepted Answer

DOL = Contribution ÷ Profit (at a given sales level).

Question 10

BEP (units) is calculated as:

Accepted Answer

BEP units = Fixed cost divided by contribution per unit.

Question 11

If fixed cost increases, BEP (units) will:

Accepted Answer

Higher fixed cost requires more contribution to break even.

Question 12

A higher P/V ratio generally means:

Accepted Answer

P/V measures contribution margin ratio.

Question 13

Elasticity of demand measures:

Accepted Answer

Elasticity is a responsiveness measure in percentage terms.

Question 14

In a decision tree, a decision node is usually represented by:

Accepted Answer

Square = decision node; circle = chance node.

Question 15

Currency depreciation makes imports:

Accepted Answer

Depreciation means more domestic currency needed per unit foreign currency.

Question 16

Regression analysis in demand forecasting is an example of:

Accepted Answer

Regression estimates the demand function using data.

Question 17

A necessary condition for price discrimination is:

Accepted Answer

Firm must segment markets and prevent resale.

Question 18

Micro environment includes:

Accepted Answer

Micro environment includes close actors like customers, suppliers, competitors.

Question 19

Trade discount is offered to:

Accepted Answer

Trade discount is given in the distribution channel.

Question 20

Expected Monetary Value (EMV) is used mainly for decisions under:

Accepted Answer

EMV uses probabilities, so it applies under risk.

Question 21

What is price skimming?

Accepted Answer

Price skimming is charging a high initial price to skim early profits, then lowering price over time.

Question 22

What is PESTLE?

Accepted Answer

**PESTLE** is a framework to analyse **Political, Economic, Social, Technological, Legal and Environmental** factors.

Question 23

Write the decision rule for NPV.

Accepted Answer

Accept a project if **NPV > 0**.

Question 24

What is opportunity cost?

Accepted Answer

Opportunity cost is the value of the best alternative sacrificed when one option is chosen.

Question 25

Define risk.

Accepted Answer

**Risk** is a situation where outcomes are uncertain but **probabilities can be estimated**.

Question 26

What is a sunk cost?

Accepted Answer

A sunk cost is a past cost already incurred that cannot be recovered and is irrelevant for current decisions.

Question 27

What is penetration pricing?

Accepted Answer

Penetration pricing is charging a low initial price to enter a market and quickly gain market share.

Question 28

What is price discrimination?

Accepted Answer

Price discrimination is charging different prices to different customers for the same product, not due to cost differences.

Question 29

Define uncertainty.

Accepted Answer

**Uncertainty** is a situation where outcomes are uncertain and **probabilities are not known reliably**.

Question 30

What is marginal product (MP)?

Accepted Answer

Marginal product is the additional output produced by employing one more unit of a variable input (MP = ΔTP/ΔL).

Question 31

Write a general demand function and explain the meaning of variables briefly.

Accepted Answer

A general demand function can be written as: Qd = f(P, Y, Ps, Pc, T, A, E, N).

Where P = price of the good, Y = income, Ps = price of substitutes, Pc = price of complements, T = tastes/preferences, A = advertising, E = expectations, N = number of buyers.

This shows demand depends on multiple factors, not only price.

Question 32

Explain features of perfect competition (any five).

Accepted Answer

Features of perfect competition (any five):
1) Large number of buyers and sellers.
2) Homogeneous product.
3) Firms are price takers.
4) Free entry and exit.
5) Perfect information (ideal).
6) No selling cost (ideal).

Hence individual firms cannot influence market price.

Question 33

Differentiate between microeconomics and macroeconomics (brief).

Accepted Answer

Microeconomics studies individual units like consumers, firms and industries; it explains demand, supply, costs and pricing.

Macroeconomics studies the economy as a whole; it deals with aggregates like national income, inflation, unemployment, interest rates and business cycles.

Managerial economics mainly uses micro tools but also considers macro factors for business environment.

Question 34

Explain CVP analysis (meaning + use).

Accepted Answer

**CVP (Cost–Volume–Profit) analysis** studies how **costs** and **sales volume** affect **profit**. It is used for **short-run planning**.

**Uses (any three):**
- **Break-even analysis**: find sales needed for **no profit no loss**.
- **Target profit planning**: decide required sales to earn a desired profit.
- **Pricing and cost control**: see impact of changing **price**, **variable cost** or **fixed cost**.

A manager uses CVP to reduce uncertainty and set realistic sales targets.

Question 35

Explain pricing objectives (any five).

Accepted Answer

Pricing objectives (any five):
1) Profit maximisation (short/long run).
2) Sales maximisation (increase volume).
3) Market share/growth (penetration strategy).
4) Survival during recession (cover variable costs).
5) Price stability (avoid frequent price changes).
6) Quality/brand image (premium pricing).

Firms often use multiple objectives depending on market situation.

Question 36

Explain price-output determination under perfect competition in short run and long run.

Accepted Answer

Perfect competition: many firms sell a homogeneous product, so each firm is a price taker.

Short-run price-output determination:
1) Market determines price P; for the firm, AR=MR=P (horizontal).
2) The firm chooses output where MR (=P) = MC (and MC is rising).
3) Profit/loss depends on comparison of P with AC at that output: 
   - P > AC: supernormal profit
   - P = AC: normal profit
   - P < AC: loss
4) Shutdown condition (mention): if P < AVC, the firm shuts down in short run; if P ≥ AVC, it may operate even at loss because it covers variable cost.

Long-run equilibrium:
- Entry occurs if firms earn supernormal profits; supply increases and price falls.
- Exit occurs if firms incur losses; supply decreases and price rises.

Long-run equilibrium conditions:
- P = MR = MC and P = AC (only normal profit).
- Firms operate at minimum LAC (productive efficiency).

Thus, competitive forces ensure only normal profit in the long run.

Question 37

Explain price elasticity of demand in detail. Describe measurement methods and relate elasticity to total revenue.

Accepted Answer

Price elasticity of demand (PED) measures how quantity demanded responds to a change in price. Formula: Ep = %ΔQ / %ΔP (usually negative due to inverse relation; often taken in absolute value). Degrees of PED: perfectly inelastic (0), relatively inelastic (<1), unitary (=1), relatively elastic (>1), perfectly elastic (∞). Measurement methods: 1) Percentage method: Ep = % change in Q / % change in P. 2) Total outlay/total revenue method: observe change in TR (P×Q) when price changes. 3) Point (geometric) method: for straight-line demand curve, Ep = (lower segment / upper segment) at a point. 4) Arc elasticity method: Ep = (ΔQ/ΔP) × ((P1+P2)/(Q1+Q2)) between two price-quantity points. Elasticity and total revenue relationship (TR test): - If |Ep| > 1 (elastic): price ↓ → TR ↑; price ↑ → TR ↓. - If |Ep| < 1 (inelastic): price ↑ → TR ↑; price ↓ → TR ↓. - If |Ep| = 1 (unitary): TR remains unchanged. Managerial use: firms with elastic demand should be careful in raising prices; firms with inelastic demand can increase price to raise revenue.

Question 38

Explain decision tree method and sensitivity analysis. Show steps/flow and a small table for sensitivity.

Accepted Answer

### **Decision tree**
A **decision tree** is a diagram showing decisions and chance events in sequence.

### Steps (rollback method)
1) Identify **decision alternatives** (decision node = square).
2) Add **chance outcomes** with probabilities (chance node = circle).
3) Write **payoffs** at end branches.
4) Compute **expected values backward** (rollback).
5) Choose the path with best value (as per objective/risk attitude).

```text
Square (Decision) → Circle (Chance) → Payoffs
             ← Rollback (compute EV backward)
```

### **Sensitivity analysis** (risk driver)
Sensitivity analysis tests how results change when **one variable** changes.

| Variable changed | Change | Result impact |
|---|---:|---|
| Demand | ±10% | profit changes a lot? |
| Price | ±5% | profit changes a lot? |

Managers focus on variables with the biggest impact (key risk drivers).

Question 39

Explain NPV method and compare it with payback period method using a table.

Accepted Answer

### **NPV (Net Present Value)**
**NPV** is the difference between **PV of cash inflows** and **initial investment (PV of outflows)**.

**Formula:**
- **NPV = Σ [CFt/(1+r)^t] − Initial Investment**

### **Decision rule**
- **Accept** if **NPV > 0** (project adds value)
- **Reject** if **NPV < 0**

### **Payback period**
Payback measures the **time to recover initial investment**.

### **Comparison (exam table)**
| Method | Considers TVM? | Considers all cash flows? | Best for |
|---|---:|---:|---|
| **Payback** | No | No (ignores after payback) | liquidity focus |
| **NPV** | Yes | Yes | wealth maximisation |

Thus, **NPV is superior** for decision-making, while payback is a quick risk/liquidity measure.

Question 40

Explain price-output determination under monopoly. Include AR-MR relationship and steps of equilibrium.

Accepted Answer

Monopoly is a market with a single seller and no close substitutes, protected by barriers to entry. The monopolist faces the market demand curve.

Revenue relationship:
- AR (demand) curve is downward sloping.
- MR lies below AR because to sell additional units, the monopolist must reduce price on all units (for a single price market).

Equilibrium/price-output determination steps:
1) Find the output level where MR = MC (and MC is rising). This gives equilibrium output (Q*).
2) Determine price (P*) from the AR (demand) curve corresponding to Q*.
3) Profit depends on comparison of P* with AC at Q*. If P* > AC, the monopolist earns supernormal profit.

Important points:
- Unlike perfect competition, price is not equal to MR under monopoly.
- Monopoly can maintain profit in long run because entry is blocked.
- Monopoly has no supply curve because price-output pair depends on demand and MC conditions.

Thus, monopoly sets output first (MR=MC) and then charges the price from demand curve.

Managerial Economics — Question Paper

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