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managerial economics
Managerial Economics 8th Edition D N DWIVEDI - Solutions
What is investment multiplier? How is investment multiplier worked out?
Suppose( i) C = 50 + 0.75 Y( ii) I = 50 ( iii) Δ I = 10(a) derive saving function(b) work out the multiplier and (c) find Δ Y.
Suppose a two-sector model is given as follows:Consumption : C = 100 + 0.8 Y Investment: I = 50 Find (a) Equilibrium level of income (b) Consumption at equilibrium income,(c) Δ Y if Δ I = 20, all other things being given.
Suppose a two-sector model is given as follows:Consumption : C = a + 6 Y Investment: I = I (constant)Find (a) Y at equilibrium (b) Δ Y if I increases to I + Δ I.
What is multiplier? Explain how multiplier effect of an additional investment affects equilibrium income in a two-sector economy. Draw a diagram to show that Δ Y > Δ I when MPC> 0.
Show graphically that the equilibrium level of income and output once determined remains stable. Show also that if some extraneous factors disturb the equilibrium, the disequilibrium itself creates conditions for the system to return to the equilibrium.
Find the equilibrium level of income, consumption and savings.
Suppose consumption function of a two-sector economy is given as C =200 + 0.8 Y and I =
Suppose consumption function is given as C = 100 + 0.75 Y and investment at `100 billion. State the aggregate demand function and present it graphically.
Suppose consumption function of an economy is given as C = a + bY.Derive the saving function for the economy. Illustrate both the functions graphically.THEORY OF NATIONAL INCOME DETERMINATION 557
What is the meaning of the consumption function? Suppose a consumption function is given as C = a + bY. How can you derive a saving function from this consumption function?
Explain the concepts of aggregate demand and aggregate supply. Using aggregate demand and supply illustrate how equilibrium of national income is determined.
What method is used for estimating national income in India? Explain the method of income estimation in India.
Explain the value added method of estimating national income? Why value is added method applied to estimate the national income?
Distinguish between net product method and factor income method.Under what conditions are these methods used to estimate national income?
Explain different methods of measuring national income. How is the method of estimating national income chosen?
Distinguish between (a) GDP and GNP, (b) NNP and NDP, (c) Nominal GNP and Real GNP.
Distinguish between ( i) economic and non-economic production, and ( ii)final products and intermediate products. What is their relevance in measurement of national income?
What is the relevance of national income statistics to business decisions?What kind of business decisions have to be taken by taking national income status?
Illustrate graphically the circular flows of income and expenditure in a four-sector model. Explain also the effect of adverse and favourable balance of trade on the size of the circular flows.
What is the effect of change in personal taxes and the government expenditure on the circular flows of income and expenditure? Does a balanced budget policy result in expansion or reduction in the circular flows?
How does the addition of the government sector to the two-sector model change the structure of the model and of the circular flows?
What is meant by withdrawals and injections? How do they affect the size of the circular flows of income and expenditure in an economy?
Describe an economy in terms of circular flows of income and expenditure. What determines the magnitude of the circular flows?
What are the two main flows in an economy? How do they arise? What do they signify?
Suppose a firm is planning to expand the production of its product. How do you think macroeconomics will be helpful in determining the scale of production.
What factors led to emergence of macroeconomics? Did macroeconomics resolve economic problems of post Great Depression era?
How does macroeconomics contribute to business decision-making?
Write a short note on the development in the field of macroeconomics in the post-Keynesian period.
What are the major macroeconomic issues confronting the economies of the world? How do you think macroeconomics can help in solving related problems?
What is the scope of macroeconomics? How is it different from the scope of microeconomics?
Is macroeconomics a positive science or a normative science? Explain in this regard the importance of macroeconomics.
Macroeconomics does not study which of the following?(a) Performance of the entire economy(b) Determination of the levels of economic activities(c) Price and output determination of a commodity(d) Factors and forces of economic fluctuations(e) Interrelationships between macro variables.
What is macroeconomics? How is it different from microeconomics?What are the uses and limitations of macroeconomics?
Write short notes on the following.(a) Hurwicz Decision Criterion(b) Laplace Decision Criterion(c) Wald’s Maximum criterion.
How is investment decision under the condition of uncertainty different from that under the condition of certainty? Explain the minimax regret criterion of investment decision.
What is certainty equivalent approach to investment decision-making?How is this method different from risk-adjusted discount rate approach?
Define risk-return possibility curve and risk-return indifference curve.Illustrate graphically investment decisions with the help of these curves.
What role does a decision tree play in business decision-making? Illustrate the choice between two investment projects with the help of a decision tree assuming hypothetical conditions about the states of nature, probability distribution and corresponding pay-offs.
Explain probability theory approach to investment decision-making. What are the limitations of this approach?
What is a decision tree? What are the basic elements and steps in the construction of the decision tree? How does a decision tree help in investment decision-making?
Suppose an investment project costing `100 million is expected to yield a return of `115 million after a period of one year. If IRR = 0.08 and risk probability = 0.12, find the risk-adjusted NPV.Is the project acceptable on these conditions? Suppose expected return increases tò125 million, will it
Explain the risk adjusted discount rate method of Construct a pay-off matrix and find the most acceptable strategy.498 Part V: CAPITAL BUDGETING AND INVESTMENT DECISIONS investment decision. What is the purpose of using risk-adjusted discount rate? Suppose a return of `1000 is expected two years
Suppose an investor has a certain amount to invest and considers four strategic actions for investment, S 1, S 2, S 3 and S 4.The expected pay-offs of the Strategy States of economy four strategies under three High growth Low growth Recession different states of the economy S 1 30 18 8(high growth,
What is a pay-off matrix? What kind of data is required to construct a payoff matrix? How does it help in investment decision-making?
Define the concepts of risk and uncertainty. How does uncertainty create a different situation for investment decision-making compared to risk?
Why do the firms use different sources to acquire capital from the capital market? How is the weighted cost of capital calculated? Illustrate your answer through an example.
How is the cost of equity and debt capital calculated? What factors are taken into account while determining an appropriate combination of equity and debt capital?
What is meant by cost of capital? What are the different sources of capital available to a corporate firm?
Suppose an investment costing `500 million is expected to yield returns of `300 million in the first year, `200 million in the second year, and `100 million in the third year.It has no scrap value after the third year. Find (a) the present value of the total return at 10% interest rate and(b)
Suppose a company is considering an investment of `50 million. The market rate of interest is 10 per cent and anticipated marginal efficiency of investment is 12 per cent.How will the company react to each of the following changes in the conditions?(a) Market rate of interest increases to 14 per
What is internal rate of return? What is the method of working out internal rate of return? Suppose an investment project costs `5,000 and yields an annual income of `2,500 over three years, find the internal rate of return.
What is meant by the net present value of future returns? Explain the use of net present value in making investment decisions.
What is meant by time value of money? How is the present value of an income expected in future calculated?
Suppose an investment project costs `5,000 and yields an annual income of `2,500 for a period of three years. Find the marginal efficiency of capital.
Define and explain the concept of marginal efficiency of capital. What is its significance in investment decisions? Explain and illustrate the use of marginal efficiency of capital in determining the optimum level of investment.
Suppose an investment yields an income of `500 in the first year, `1000 in the second year and `1500 in the third year. If rate of interest is 10%, what is the present value of this income stream?
Explain the concept of the present value of a future income. Explain why it is necessary in an investment decision to discount the future income stream.
What criteria are used for making choice of investment projects? Explain the pay-back period criterion and its limitations as a choice criterion.
Suppose a firm has five investment projects—A, B, C, D and E—and their costs and expected return in the following table.From the data given in the table ( i) derive the demand curve for capital and (ii) find the demand for capital at the fixed interest rate of 8% per annum.
What is meant by optimum level of capital? How is the optimum level of capital determined?
What is meant by capital budgeting? What is the importance of capital budgeting in long-term investment decisions? What are the prerequisites of capital budgeting?
Suppose domestic and foreign demand have different levels and demand curves have different elasticities. How are domestic and dumping prices are determined to maximise profits from the domestic and foreign markets?
What is meant by dumping? What are the necessary conditions for successful dumping?
What is meant by ‘peak-load pricing’? Why is sometimes peak-load pricing inevitable? What are its advantages and disadvantages?
Discuss the technique of multiple product pricing. Illustrate your answer.Why cannot a single average price be fixed for all products?
What is the life-cycle of a product? What kind of pricing strategy is adopted over the life-cycle of a product? What do you think will be an appropriate price policy when the demand reaches its saturation and substitute products are likely to enter the market?
Suppose a car company produces cars of two brands – AC-car and non-AC car – under the following conditions: ( i) average and marginal cost curves for both brands are the same, and( ii) the two car brands have demand curves with different elasticities. How will the firm determine the price of
What is meant by transfer pricing? How is the price of transfer product determined under the following conditions?( i) There is no market for the transfer product; and( ii) There is a competitive market for the transfer product.
Distinguish between penetrating pricing and skimming pricing? Which of these methods of pricing is beneficial for the firm facing severe competition?
Why does the problem of multiple product pricing arise? How is the price of each product determined by a firm with multiple products?
What is the method of mark-up pricing? Is this method of pricing different from the marginal rule of pricing?
Discuss the cost-plus method of pricing. How is this method of pricing different from the traditional theories of pricing?
What is the controversy on the traditional theories of price determination and empiricists’ view on price determination in practice? What is the outcome of the controversy?
How will you judge whether alternative theories really offer a more plausible alternative to the conventional theory of the firm?
What is the basic postulate of the behavioural model of Cyert and March?How does the top management determine the aspirational goals of the firm? Is this model a genuine theory of business firms?
How does Marris define the balanced growth of the firm? How do managers arrive at the balanced growth? What kind of financial policy do the managers adopt to secure their stake in the firm?
Explain Williamson’s model of managerial utility maxi mization. How does this model explain the equilibrium of the firm?
Explains Baumol’s model of price and output determina tion with and without advertisement.Does this model offer a more appropriate explanation to price and output determination than the conventional theory?
Explain Baumol’s theory of sales revenue maximization? In what way is this theory superior to the conventional theory based on profit maximization hypothesis?
What lies at the foundation of the alternative theories of business firms?Do the alternative theories really offer an alternative explanation to firms’ behaviour?
What is meant Nash Equilibrium? How was the Nash equilibrium formulated? What purpose does serve?
What is meant by dominant strategy? How is dominant strategy worked out?
What is meant by payoff matrix? Illustrate the formation of the payoff matrix by using an example of business problem of oligopoly firm.
What is meant by prisoners’ dilemma? How is prisoners’ dilemma used to explain the problem of oligopoly firms? How does it help in resolving the problem?
What is meant by ( i) strategy, ( ii) payoff, ( iii) payoff matrix, and ( iv)dominant strategy? Explain these concepts with some example.
In what way does the game theory help in resolving the decision-making problem of the oligopoly firms? Does the game theory offer a realistic solution to the problem of oligopoly firms?
What is the reason for the formulation of the game theory? What is the objective of the game theory?
Suppose there are five firms in an oligopoly market, one of them being a dominant one. The market demand function is given as QM = 200 – 2 P and the supply function of 4 small firms together is given as Qs = 20 + P The cost function of the dominant firm reads as follows.TCD = 100 + 12 Q + 0.25 Q
Firm 1 is a low-cost firm whereas Firm 2 is a high-cost firm. Both the firms face an identical demand curve given by the demand function as Q = 50 – 0.5 P The cost functions of the two firms are given, respectively, as TC 21 = 100 + 20 Q 1 + 2 Q 1 and TC 22 = 48 + 36 Q 2 +2 Q 2 Find the
Suppose there are two oligopoly firms—Firm 1 and Firm
The general demand curve for oligopoly firms is given by the demand function D 1 = 50 – 0.5 P 1 The firms however believe that their individual demand function is D2 = 80 – P2 Their identical cost function is given as TC = 150 + 10 Q + 0.05 Q 2(i) Find the initial level of price and output
Suppose in an oligopoly market, the joint demand curve for small firms A, B and C is given as Q = 100 – 2P and their joint supply curve is given as Q = 5 + 2 P. Derive the demand curve for the dominant firm, D. Find the price determined by the dominant firm assuming its MC function given as MC =
How does a firm in oligopoly market gain the status of a dominant firm?Suppose there are four firms, A, B, C and D, in an oligopoly market, firm D being the dominant one. Explain and illustrate price determination by the dominant.
While F 1 is a low cost and F 2 is a high cost firm. The firm F 1 acts as a price leader. Using an appropriate price-leadership model, explain and illustrate graphically price determination by the low-cost firm. Should F 2 accept the price leadership of F 1? Give reasons for your answer.
Suppose there are only two firms in an oligopolistic industry, F 1 and F
Suppose an industry is characterized by oligopoly and is dominated by a large firm. The supply curve for the small firms in an oligopoly market is perfectly elastic. Does the dominant firm have any role in this kind of market? Does it still have a scope to determine its price like a monopolist?
Suppose there are only two firms in an oligopoly industry, F 1 and F 2, facing the demand and cost functions given as follows.Demand function: Q = 25 – 0.5P Cost function F 21 : C 1 = 50 + 10 Q + Q 1 Cost function F 22 : C 2 = 24 + 10 Q 2 + Q 2 Find the profit maximization output for firms F 1
What is meant by cartel? Why do firms in an oligopoly market form cartel? Illustrate and explain joint profit maximization by the cartel. Does cartel system work efficiently?
Using kinked demand curve model, show that price remains rigid at its current level in an oligopoly market even if there is an upward shift in the market demand curve. What happens to the price in a buoyant oligopoly market?
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