Assignment: A

Q.1. What are indifference curves? Explain the consumers equilibrium

under the assumptions of ordinal approach
The consumer behavior analysis was expanded to new horizons with the
introduction of indifference curve analysis by J.R. Hicks and R.G.D. Allen. In this
analysis, the utility is ordinal measurable. If we plot the quantities of two
commodities on the two axes, then we get a set of points that would present
alternative combination of the two commodities, between which the consumer
would be indifferent. The curve joining such points is known as an indifference
curve. So, indifference curve is the locus of Wpoints which show the different
combinations of two commodities a consumer is indifferent about the points A or B
or C or D. Below shows the example for indifference curve.

The consumer is in equilibrium when he maximizes his utility, given his income and
market prices. Two conditions must be fulfilled for the consumer to be in
equilibrium. The first condition is that the marginal rate of substitution be equal to
the ratio of commodity prices.
MRS x,y Mux / MUy = Px / Py
This is a necessary but not sufficient condition for equilibrium. The second condition
is that the indifference curves be convex to the origin. This condition is fulfilled by
the axiom of diminishing MRS x ,y , which states that the slope of the indifference
curve decreases as we move along the curve from left to right. Below diagram
depicts, to maximise utility, a household should consume at (Qx, Qy). Assuming it
does, a full demand schedule can be deduced as the price of one good fluctuates.

In Simple terms, consumer equilibrium is the point where consumer attains the
highest level of satisfaction. There are two conditions of equilibrium under ordinal
approach1. Necessary condition
Budget line is tangent to the highest possible indifference curve.
2. Sufficient condition
At equilibrium the indifference curve must be convex to the origin.
Q.2. Examine the concept and relationship of Total, Average and marginal
costs with the help of suitable diagram.
Total Cost (TC)
Total cost is the aggregate of expenditures incurred by the firm in producing a given
level of output. Total cost is measured in relation to the production function by
multiplying factors of prices with their quantities.
If the production functions is: Q = f (a, b, c.n), then total cost is TC = f (Q) which
means total cost varies with output.
For measuring the total cost of a given level of output, thus, we have to aggregate
the product of factors quantities multiplied by their respective prices.
Conceptually, total cost includes all kinds of money costs, explicit as well as implicit.
Thus, normal profit is included in total cost. Normal profit is an implicit cost. It is a
normal reward made to the entrepreneur for his organizational services. It is just a
minimum payment essential to retain the entrepreneur in a given line of production.
If this normal return is not realized by the entrepreneur in the long run, he will stop
his present business and will shift his resources to some other industry.
Now, an entrepreneur himself being the paymaster, he cannot pay himself, so he
treats normal profit as implicit costs and adds to the total cost.

In the short run, total costs may be bifurcated into total fixed cost and total variable
cost. Thus, total cost may be viewed as the sum of total fixed cost and total variable
cost at each level of output. Symbolically, TC=TFC + TVC.
Average Total Cost (ATC)
Average Total Cost or average cost is total cost divided by total units of output.
Thus:
ATC or AC = TC / Q
In the short run, since
TC = TFC + TVC
ATC = TC / Q = TFC + TVC / Q = (TFC / Q) + (TVC / Q)
Since = TFC / Q = AFC and TVC /Q = AVC,
Therefore ATC = AFC + AVC.
Hence, average total cost can be computed simply by adding average fixed cost
and
average variable cost at each level of output. To take the above example, thus
ATC = Rs. 1,166.67 + Rs. 1,500 = Rs. 2,666.67 pr chair.
Marginal Cost (MC)
The marginal cost is also per unit cost of production. It is the addition made to the
total cost by producing one more unit of output. Symbolically, MCn = TCn TCn 1,
that is, the marginal cost of the nth unit of output is the total cost of producing n
units minus the total cost of producing n 1 (i.e. one less in the total) units of
output.
Suppose the total cost of producing 4 chairs (i.e. n = 4) is Rs. 10,000 while that for
3 chairs (i.e. n 1 is Rs. 8,000. Marginal cost of producing the 4th chair, therefore,
works out as under:
MC4 = TC4 TC3 = Rs. 10,000 Rs. 8,000 = Rs. 2,000.
Marginal cost is the cost of producing an extra unit of output. In other words,
marginal cost may be defined as the change in total cost associated with a one unit
change in output. It is also an extra unit cost or incremental cost, as it measures
the amount by which total cost increases when output is expanded by one unit. It
can also be calculated by dividing the change in total cost by the one unit change in
output.
Symbolically, thus, MC = 'TC / '1Q where, ' denote change in output assumed to
change by 1 unit only.
Therefore, output change is denoted by 'It must be remembered that marginal cost
is the cost of producing an additional unit of output and not of average product. It
indicates the change in total cost of producing an additional unit.

RELATIONSHIP BETWEEN TOTAL COST, AVERAGE COST AND MARGINAL

COST

ATC (Average Total Cost) = Total Cost / quantity

AVC (Average Variable Cost) = Variable cost / Quantity

AFC (Average Fixed Cost) = Fixed cost / Quantity

Note FC (fixed costs) remain constant. Therefore the more you produce, the
lower the average fixed costs will be.

To work out Marginal cost, you just see how much TC has increased by.

For example, the first unit sees TC increase from 1,000 to 1,200 (therefore
the increase (MC) is 200)

For the second unit, TC increases from 1,200 to 1,300 (therefore the increase
MC is 100)

Q.3. Differentiate and elaborate the concepts of returns to scale and law
of variable proportions.

The Law of diminishing returns only applies in the Short Run, when only one factor
of production is variable and can be increased. The other factors of production are
fixed. Thus as the variable factor of production is increased the marginal product of
that factor will rise at first, but will at some point begin to fall.
Returns to scale can only occur when no factors of production are fixed. If the
quantities of all of the factors of production are increased, then output will also
increase. However, the amount by which output rises can either be proportionately
more than the amount that the factors of production were increased by,
proportionately less, or the same. These cases are called increasing returns to scale,
decreasing returns to scale, or constant returns to scale.
The law of diminishing returns is also called the law of variable proportion, as the
proportions of each factor of production employed keep changing as more of one
factor is added. In a factory, the factor of production most easily varied is labor.
Thus when the factory needs to increase output quickly it is likely to take on more
workers. This will lead to the marginal product rising at first, because each
additional worker will increase output by more than they increase the firms' costs.
However eventually there will be too many workers, and too few machines for them
to use. This means the marginal product will fall, and the firm is not producing
efficiently.
When the firm needs to increase its production by more than the amount available
by varying one factor, it needs to also vary the other factors. The firm would need to
buy more land, capital, enterprise and labor. That is increase all of the factors of
production, which is only possible in the long run. As the firm increases in size, it will
achieve increasing returns to scale, or economies of scale, for several reasons.
Q.4. Why is demand forecasting essential? What are the possible
consequences if a large scale firm places its product in the market without
having estimated the demand for its product?
When forecasting demand, a firm must consider the number of potential customers,
the price those customers are willing to pay, the cost of goods used to produce a
given product and the availability of those goods used in production. All of these
factors are subject to the economic laws of supply and demand.
Firms use numerous methods, both qualitative and quantitative, to forecast
demand. Qualitative methods rely on expert opinion to reach a result. A popular
qualitative forecasting method is the Delphi method. The Delphi method uses
several rounds of questionnaires in which a panel of experts revise and narrow their
prior assessments until a consensus is reached. Critics of the Delphi method say
that it is ineffective for making complex decisions and that it is limited by the
knowledge of the experts.
Quantitative methods rely on statistical and data analysis to examine historical
sales data and data from market testing. They include extrapolation and data
mining.
Demand forecasting is essential due to the following:

Better planning and allocation of resources

Appropriate production scheduling
Inventory control
Determining appropriate pricing policies
Setting s les targets and establishing controls and incentives.
Planning a new unit or expanding existing one
Planning long term financial requirements
Planning Human Resource Development strategies

There are two possible consequences when a firm places its products on the market
without having estimated the demand for its product.

The buyers may ignore the product as a result of the fact that it is abundant
in the market therefore its demand is relatively lower and hence reduces or
make nonprofit for the firm

It may be a new product which everyone in the market whats to use it and in
that sense there would be more demand for that product which would boost
the returns of the firm

Q.5. Discuss the various steps involved in a managerial decision making

process. Explain, in detail, any two group decision making techniques.
The first step in the decision-making process is identifying the problem. Problem
identification is probably the most critical art of the decision making process, for it is
what determines the direction that the decision making process takes, and,
ultimately, the decision that is made. The second step in decision-making process is
generating alternative solutions to the problem. This step involves identifying items
or activities that could reduce or eliminate the difference between the actual
situation and the desired situation. For this step to be effective, the decision makers
must all enough time to generate creative alternatives as well as ensure that all
individuals involved in the process exercise patience and tolerance of others and
their ideas.
In the Pursuit of quick fix managers too often shortchange this step by failing to
consider more than one or two alternatives, which reduces the opportunity to
identify effective solutions. After generating a list of alternatives, the arduous task
of evaluating each of them begins. Numerous methods exist for evaluating the
alternatives, including determining the pros and cons of each; performing a costbenefit analysis for each alternative; and weighting factors important in the
decision, ranking each alternative relative to its ability to meet each factor, and
then multiplying cumulatively to provide a final value for each alternative.
Selecting the Best Alternative after the decision-makers have evaluated all the
alternatives, it is time for the fourth step in the decision-making process choosing
the best alternative. Depending on the evaluation method used, the selection

process can be fairly straight forward. The best alternative could be the one with
the most "pros" and the fewest "cons", the one with the greatest benefits and the
lowest costs, or the one with the highest cumulative value, if using weighting
Implementing the Decision
This is the step in the decision making process that transforms the selected
alternative from an abstract situation into reality. Implementing the decision
involves planning and executing the actions that must take place so that the
selected alternative can actually solve the problem. Evaluating the Decision In
evaluating the decision, the sixth and final step in the decision-making process,
managers gather information to determine the effectiveness of their decision. Has
original problem identified in the first step been resolved? If not, is the company
closer to the situation it desired than it was at the beginning of the decision-making
process?
Group Decision Techniques
Brainstorming Technique
Brainstorming is a technique in which group members spontaneously suggest keys
to solve a problem. Its primary purpose is to generate a multitude of creative
alternatives, regardless of the likelihood of their being implemented.
Nominal Group Technique
The Nominal Group Technique involves, the use of highly structured meeting agenda
and restricts discussion or interpersonal communication during the decision making
process. While the group members are all physically present, they are required to
operate independently.

ASSIGNMENT B
Q.1. Why a firm is price taker and not a price maker under perfect market
conditions?
Under perfect competition, number of firms producing homogeneous commodity is
very large. An individual firm in such a market cannot affect price of the commodity.
Price is fixed by the forces of market demand and market supply. It is at this price
that all the firms in the industry sell their output. On its own, no firm can change the
prevailing market price. It is because of the following reasons.
Number of Firms - The number of firms under perfect competition is so large that no
individual firm, by changing its supply, can cause any meaningful change in the
total market supply. Accordingly, market price cannot be affected on the basis of
supply of a firm.
Homogenous Product - All firms in a perfectly competitive industry produce
homogeneous product. In such a situation if any firm fixed its price higher than the
equilibrium market price, buyers would shift from this firm to other firms in the
market. The policy of higher-price (higher than the equilibrium market price) will
simply fail.
Irrationality of Lower Price Fixation - Firm's Demand curve under perfect competition
is perfectly elastic. It means that a firm can sell whatever amount it wishes to see at
the existing market price. In such a situation, the policy of attracting buyers by
lowering the price by a firm would be a folly.
Thus it is concluded that under perfect competition it is neither possible nor
desirable for an individual firm to change the prevailing market price. The firm is
simply a price taker and not a price maker.
Q.2. Profit maximization is theoretically the most sound but practically
unattainable objective of business firms. In the light of this statement
critically appraise the Baumols sales revenue maximization theory as an
alternative objective of the firm.
Profit maximization is theoretically the most sound but practically unattainable
objective of business firms
Baumols Sales Revenue Maximization Theory states that:

Managers rewards are more closely linked to Sales rather than Profits.
Firms aim to maximize Sales Revenue, but subject to a Profit Constraint.
Profit constraint is exogenously determined by the demand and expectations
of the shareholders, banks and other financial institutions.
A Sales Revenue maximizing firm, in general, produces a greater output than
a Profit Maximizing Firm and sells at a price lower than the profit maximizer.

The maximum sales revenue will be where e = 1 (and hence MR = 0) and will
be earned only if the profit constraint is not operative.
If the profit constraint is operative the sales revenue maximize will operate in
the area where price elasticity is greater than unity.
Q = Profit Maximizing Output
QS =Sales Maximizing Output
QRS =Constrained Sales Maximizing Output

=Profit Curve
Q.3. Distinguish between skimming price and penetration price policy.
Which of these policies is relevant in pricing a new product under different
competitive conditions in the market?
Skimming pricing is the strategy of establishing a high initial price for a product
with a view to skimming the cream off the market at the upper end of the demand
curve. It is accompanied by heavy expenditure on promotion. A skimming strategy
may be recommended when the nature of demand is uncertain, when a company
has expended large sums of money on research and development for a new
product, when the competition is expected to develop and market a similar product
in the near future, or when the product is so innovative that the market is expected
to mature very slowly. Under these circumstances, a skimming strategy has several
advantages. At the top of the demand curve, price elasticity is low.
Besides, in the absence of any close substitute, cross-elasticity is also low. These
factors, along with heavy emphasis on promotion, tend to help the product make
significant inroads into the market. The high price also helps segment the market.
Only non-price conscious customers will buy a new product during its initial stage.
Later on, the mass market can be tapped by lowering the price. If there are doubts
about the shape of the demand curve for a given product and the initial price is
found to be too high, price may be slashed. However, it is very difficult to start low
and then raise the price. Raising a low price may annoy potential customers, and
anticipated drops in price may retard demand at a particular price. For a financially
weak company, a skimming strategy may provide immediate relief. This model
depends on selling enough units at the higher price to cover promotion and

development costs. Whereas Penetration pricing is the strategy of entering the

market with a low initial price so that a greater share of the market can be captured.
The penetration strategy is used when an elite market does not exist and
demand seems to be elastic over the entire demand curve, even during early stages
of product introduction. High price elasticity of demand is probably the most
important reason for adopting a penetration strategy. The penetration strategy is
also used to discourage competitors from entering the market. When competitors
seem to be encroaching on a market, an attempt is made to lure them away by
means of penetration pricing, which yields lower margins. A competitors costs play
a decisive role in this pricing strategy because a cost advantage over the existing
manufacturer might persuade another firm to enter the market, regardless of how
low the margin of the former may be. One may also turn to penetration strategy
with a view to achieving economies of scale. Savings in production costs alone may
not be an important factor in setting low prices because, in the absence of price
elasticity, it is difficult to generate sufficient sales. Finally, before adopting
penetration pricing, one must make sure that the product fits the lifestyles of the
mass market. For example, although it might not be difficult for people to accept
imitation milk, cereals made from petroleum products would probably have difficulty
in becoming popular. How low the penetration price should be differs from case to
case.

CASE STUDY
Michael Wolfson, a computer programmer had a decent job with the financial
powerhouse Bear, Stearns & Co. Now, he refurbishes computers at the basement in
his house and sells it through e-bay. He plans to join as a school teacher. Michael
lost his job in 2003. He was told that his job is being outsourced to India. Paul
Schwartz, a mainframe programmer, who was earning $ 80,000 a year was told that
his services were no longer required. He suspects that his job has been outsourced
to India.
There is growing dissent among the Americans against the increasing practice of
outsourcing. It has become an electoral issue in the coming presidential elections in
the US. The Democratic candidate, John Kerry has made it an emotive issue, despite
economists trying to portray the positive aspects of outsourcing.There are
numerous reasons for the growing apathy towards outsourcing. The prevailing
economic situation and the increasing joblessness in the US have added fuel to the
fire. However, many analysts feel that joblessness in the US is cyclical in nature
resulting from the recession of 2001 and hence, a recovery will create job
opportunities.
Moreover, according to the U.S.-India Business Council, the increasing
unemployment is also due to corporate restructuring and just a quarter of the job
loss is due to outsourcing. Since, the beginning of 2001, the real job loss in US is
estimated to be 2.3 million. In comparison, the actual job loss due to outsourcing is
estimated to be only 200,000. Thus, it can be said that there are various other
reasons for joblessness in the US. The outcry against outsourcing seems to be
driven more by politics rather than economics.
Outsourcing forms a small proportion of the jobs that are regularly churned in the
US economy. On an average, 24 million jobs are churned in the US every month. In
the process, resources are allocated, for more productive purposes. To come out of
the recession and raise the standards of living, higher productivity seems to be the
only solution. The debate on outsourcing gathered momentum only in the recent
past. A study by Forrester, a research group, in the year 2002, brought the issue
into limelight. The report claims that by 2015, 3.3 million white-collar jobs in the US
would be transferred to countries like India.
The Economics of Outsourcing
But is outsourcing so bad for the US economy? Gregory Mankiw, professor of
economics at the Harvard University and head of President Bush's Council of
Economic Advisers, recently told presspersons that outsourcing of jobs is in better
interest of US. According to him, outsourcing lowers the cost for consumers, making
the corporations more efficient. There were a series of articles in The Economist,
highlighting the advantages of outsourcing. There are many influential groups in the
US who are perturbed by the recent outcry against outsourcing. Says Charles E
Morrison, President, East West Center, a US based think tank, "Off-shoring is not an
economic problem, but an economic opportunity". Many analysts in the US feel that
anti off-shoring bills in the US would prove to be ineffective. Similar views were
echoed by Michael T Clark of US-India business council. He says that, "Jobs lost to

offshoring were less than a quarter of all jobs lost in the US in 2002. The rest were
lost due to corporate restructuring.
The current debate in the US on off-shoring is informed by lack of facts". In an
article, "Why Your Job Isn't Moving to Bangalore" in the New York Times, Jagdish
Bhagwati, a senior fellow at the Council on Foreign Relations and professor at
Columbia University writes that the panic and furor over outsourcing is completely
unwarranted. He further says that no jobs are being taken away from America. He
says that the affect of changes in technology is being felt in the labor intensive
industries. According to him, the loss of jobs in the US is due to technological
changes.
Professor Bhagwati is also critical about politicizing the whole issue. He says that
outsourcing will strengthen the competitiveness of the US companies. Firms
ignoring the cheaper supplies would lose out. Professor Bhagwati further says that
outsourcing service jobs is nothing different from importing of labor-intensive
textiles and other goods. According to him, all empirical studies in the US over the
last two decades suggest that wage stagnation in the manufacturing industry is
more due to automation of the processes, not the cheaper imports. The same is
applicable to service industry as well.
Jane Linder of Accenture's Institute for Strategic Change says that companies
outsourcing the traditional back-office work have more control and discipline over
their operations. Moreover, employees of the company can concentrate on framing
strategies. Further, outsourcing also results in greater efficiency and lowering costs.
This allows companies to offer better services to customers. A study done by
McKinsey Global Institute reveals that for every dollar of work outsourced by the US,
it gets back $1.14 as income, and the countries to which the work is being
outsourced gains 35 cents. This shows that outsourcing is a win-win situation for
both the countries.
Benefits for US
Savings to US investors or
customers
Imports of US goods and services
by providers in India
Transfer of profits by US based
providers in India back to US
Net direct benefit retained in US
Value for US labor reemployed
Potential net benefit for US

Benefits for India

0.
0.58 Labor
1
Profits retained in
0.
0.05
India
1
0.
0.04 Suppliers
09
Central government 0.
0.67
taxes
03
0.45- State government
0.
0.47 taxes
01
1.120.
Net benefit to India
1.14
33

There is a definite cost advantage in off-shoring work to India. These advantages

are a result of lower wages in the developing countries along with the development
of telecommunications in these countries. A report published by HSBC, which has

off- shored more than 4,000 jobs to India, says that the telephone costs from India
to America and Britain has decreased by almost 80%, since January 2001. The wage
difference between these countries is also a factor that forces the companies to
outsource their business processes to India. A study done by NASSCOM, says that
the average salary of an IT professional in UK is $96,000, in US it is $75,000,
whereas in India it is just $26,000. The wage difference between the low end call
center jobs of both the countries is also very wide. An average call center employee
in UK earns $20,000 on the average. Whereas, a call center professional in India
barely manages to earn one tenth of the earnings of their British counterparts.
Offshoring allows companies to work round the clock. It gives ample time to the
companies to think about their IT problems.
Recently, American Express paid $5,000 to a group of software programmers in
India, to develop a package for them. The same would have cost them several
million dollars in US. The benefits of outsourcing go much beyond the cost
advantage. An article in Mckinsey quarterly suggests that the companies need to
look beyond cost savings. The article says that "Companies are merely replicating
what they do at home, where labor is expensive and capital is relatively cheap, in
countries in which the reverse is true."
Alan Greenspan, US Federal Reserve Chairman, is a staunch supporter of
outsourcing. He is of the opinion that any move to curb outsourcing of work to
countries like India and China, might give just a temporary relief. Reacting to the
proposed legislations in the US banning outsourcing, Greenspan said, "A new round
of protectionist steps is being proposed against outsourcing. These alleged cures
will make matters worse". Greenspan feels that any effort to protect US jobs
through
legislation
would
backfire.
Not all companies have taken full advantage of outsourcing. According to Harris
Miller, president of the Information Technology Association of America (ITAA), a
lobby group, so far only 3-4 % of all American companies outsource their processes.
The remaining still rests with American firms. A report published by Forrester, in
December 2003, says that 60% of the Fortune 1000 companies have a negligible or
near nil presence in off-shoring. Report also suggests that 40% of the work of these
companies could be outsourced. Thus, the potential for growth in outsourcing is still
immense.
Advancement in the technology can give a further push to the off-shoring activity.
The inflexible architecture of the current technologies is acting as a hindrance in offshoring, says Simon Heap of Bain & Co, a consultancy firm. The advancement in
software and hardware would enable the companies to off-shore even small
activities. Firms would be able to off-shore the activities of the entire department,
say
billing
of
customers.
However, not everyone seems to agree with the supporters of outsourcing. Stephen
Roach, the chief economist at Morgan Stanley, says that it is only the wage
difference that is encouraging companies to outsource work to India or any other
developing country. He further says that joblessness is taking away the charm of
recovery in the US.

Many analysts also feel that companies should take some concrete steps to
minimize the affects of outsourcing. Companies should make the process of job
transfers to offshore destinations more smooth. British Telecom exhibited a process
of outsourcing that can be used as a model by other companies.
n 2003, when BT announced that it is planning to open two call centers in India,
with a capacity of 2200 people, it was criticized from all corners. It was said that BT
was not acting in a socially responsible manner. Realizing the gravity of the
situation, BT approached Sustainability, an international consultancy, specializing in
business strategy and sustainable development. The consultancy firm was asked to
find whether or not outsourcing and corporate social responsibility (CSR) co-exist.
Sustainability noted that the immediate impact of outsourcing would be job loss for
the employees, and the resulting effect on the society. The consultancy firm was of
the opinion that before outsourcing, companies should address the negative impact
of outsourcing. In order to check the negative impact of off-shoring, firms should
consult with employees, trade unions, communities and other key stakeholders.
Employees should be involved in the process of any such decision making.
Sustainability also suggested that firms should be transparent and make the
employees know the services that are being outsourced.
Firms should also make an attempt to redeploy the employees in some other
departments. This would minimize layoffs. An attempt should be made to retrain the
redundant workers. A part of the savings from off-shoring should be invested for this
purpose. As per the suggestion made by McKinsey Global Institute, 4-5% of the
resulting savings from off-shoring should be used for insurance policy for employees
to cover the lost wages.
US was one of the prime supporters of free trade. US was least bothered about the
concerns of many other developing countries when they raised their voices against
job losses as a result of the cheap exports. But, this aggressiveness seems to have
mellowed down in recent days. It always propagated that inefficient industries
should be closed. One of the primary tasks of the U.S. Trade Representative's office
was to keep a check on the world markets. It assesses the markets which are
opening up and which are getting closed as a result of high tariffs and other
quantitative restrictions. Now, with the growing efficiency of developing countries in
the service sectors, many jobs in these sectors are being transferred to developing
countries (of which a major chunk is coming to India). US is worried about the
increasing joblessness but that seems paradoxical. It hails globalization but when it
comes to the developing countries trying to reap the benefits of globalization, it
raises all sorts of issues.
Recently the US government has tightened the visa norms. The number of H-1B
visas issued to Indian software programmers fell to 65,000 from 1,95,000 in 2003.
Analysts feel that this would increase outsourcing of jobs further, particularly to
India. According to Craig Barrett, the chief executive of Intel, granting of fewer visas

would force the companies to shift their jobs to countries like India, where there is
no dearth of qualified engineers.
Despite no ban from the federal authorities on outsourcing, many States have
initiated the process of putting restrictions on outsourcing government work to
foreign countries. The lawmakers in the state of New Jersey have proposed a bill
that stops firms to outsource any government related work to a foreign country.
Succumbing to the public pressure, the government was forced to bring back a
helpline for welfare recipients that was being outsourced to India. Similarly, the
state of Indiana withdrew a $ 15 million contract from an American subsidiary of an
Indian IT firm.
Commenting on the move, the Indiana governor said that contract was not in tune
with Indiana's vision of providing better and more job opportunities to local
companies and workers. However, analysts feel that these decisions have been
influenced by political pressure in the backdrop of coming presidential elections in
the US.

The Indian Response

The Indian BPO industry is not taking the outcry against outsourcing in the US
seriously. Indian BPO firms are no longer just call centers. Their activities now cover
marketing and knowledge based services. These companies are now aspiring to
become strategic partners for US companies. There is a sudden spurt in the number
of venture capitalists willing to invest in different areas.

Though, some software companies can't hide their concern over the legislations
banning government related off-shoring in the long-run but, for now they are clear
that, these legislature will have negligible effect on the current contracts with the
private companies. Reacting to the whole issue, Narayana Murthy, Chairman and
Chief Mentor of Infosys said that there is no issue to worry about. He termed the
outcry as normal. He suggested that rather than getting worried and agitated,
Indians should put forward their point of view and explain the advantages of offshoring. He said that the present uncertain economic situation is responsible for the
concern over the job losses in the US.

Many analysts feel that the opposition to outsourcing may not end with the US
presidential elections. With many of the American States, coming out with
legislations banning government contracts to other countries, the issue of offshoring is going to be alive. Conditions for off-shoring may become favorable with
the improvement in the performance of the US economy.

Question for discussion:

Que. Give your opinion on outsourcing and its impact on the prospects of
growth of the economy of home Nation and host nation.
Guidelines for the answer: Discuss the issue in the perspective of
opportunity and threats faced by developing and developed nations.
Outsourcing entirely lies in relating it to job losses and gains with examining
assumptions made by four categories of experts that link off shoring and
outsourcing to jobs:
Journalists and others that rely on announcements of off shoring by individual
firms; market analysts who aggregate future projections by companies
Consultancies that take a simplified version of gains from international trade to
project an overall welfare gain from off shoring and
Economists who are aware of the usual theoretical caveats in examining the
impact of off shoring and outsourcing as trade on welfare, including jobs and
wages.
Other social scientists who see the main impact of off shoring and outsourcing as
the repackaging of tasks within job categories, and the redrawing of boundaries in
the system of professions.
This is an important phenomenon requiring attention by businesses, professional
associations, and public policy makers. It is just as important as the commonly
made call for policy to deal with the fact that job displacements are concentrated on
a relatively few people in comparison to the more dispersed benefit of increased
international trade.
Opportunities and Threats
Domestic companies outsource their activities as they believe it is their best
interest. Yet, is this really the case how it will affect the home country, the host
country and foreign companies? The businesses opportunities and threats are
outlined.
Effects of outsourcing
First of all, outsourcing may result in less demand for highly skilled labor and fewer
job opportunities in the home country. As a result there may be a downward
pressure on wages, which may discourage students to pursue careers in science
and technology. It may eventually result in a decrease in the economic
competitiveness of the home country.
Another point of attention is the loss of intellectual property by transferring
knowledge to other countries and, in concrete, to enterprise partners which can use
it for their own purposes. This is both a result of advertent and inadvertent
knowledge transfer.

Opportunities
The availability of well-educated local specialists, combined with low personnel
costs (cost advantage), is a supply-oriented incentive to establish abroad. In
addition, for huge human resource potential is of great importance. For example,
foreign centers in China can import certain equipment tax. In the Netherlands,
reduction in labor costs is considered an important factor for Dutch enterprises
related to the reduction in the other costs, access to new markets is also quite
important for Dutch enterprises, particularly for the ones planning to outsource
internationally. In the short term perspective, outsourcing is a perfect opportunity
for enterprising people. Many requirements for outsourcing can be demanded by
the companies and many specialists will be needed in this area. In this way, there
are many support services. A qualified partner can guide in a faster way the process
from the conceptualization of the idea to the development of it. This is especially
important in Information Technology markets where changes are fast and it is
difficult to adapt strategies and product development to such a fast changing
market.
Threats
Due to lack of transparency in policymaking, industrial, political, legal, technological
policies and strategies are very difficult to discern. It is often mentioned that there
is insufficient legislation, especially intellectual property rights, and a strong
protectionism of regional governments. This provides much uncertainty for foreign
activities in home nation. It must be emphasized that receiving promised
preferential conditions, such as tax relief and other incentives, can be a stressful
and prolonged procedure, due to multiple bureaucratic hurdles and very specific
rules. Therefore, a good relationship with the home government is crucial to
business efficiency and success. Foreign enterprises indicate that legal or
administrative barriers, taxation issues, trade tariffs and proximity to existing clients
are in general perceived as important barriers.
Yet, due to the cultural gap and language problems, huge potential remains
untapped in home nation. Foreign managers come from low context cultures and
are used to capture the message meaning with words alone. They believe spelling it
out clearly is the only way to avoid ambiguity. On the contrary, the Chinese culture
is a very high context culture. Here a message is delivered with nonverbal signals,
unspoken assumptions, and the context or environment surrounding the
conversation. Lack of awareness between high and low context communication
styles can lead to misunderstanding, confusion and ineffectiveness. Definitely, the
strong influence of home culture will affect the approach to innovation. Concerning
the issue of the cultural gap, an extensive training program can enable expatriates
to understand the home environment, to develop awareness of cultural differences,
and to facilitate their intercultural communication skills.

At the same time, there can be an increased risk of opportunism under firms who
increasingly rely on partnering relations with foreign suppliers, especially where
there is need of a proprietary rather than a generic nature. In addition, firms
increasingly outsource activities that are crucial to the competitive advantage of the
firm. Industries which outsource activities increase their dependence on others.
Therefore, outsourcing can become a source of serious bargaining and learning
problems in the long.

Intellectual property rights

Property rights represent the full range of possibilities by which a firm can protect
its ideas, through formal mechanisms (say patenting, copyright and trademarks)
and informal mechanisms (say product complexity, secrecy and lead time to
market). Still piracy of intellectual property is widespread for which foreign
enterprises have expressed serious concerns. The process of starting and winning a
patent case is still almost impossible and definitely time consuming. Additional
concerns of foreign companies include long patent application procedures and a
lack of public acceptance of Intellectual Property Rights legislation.

Assignment C
Multiple choice questions
Q.1. A change in quantity demanded refers to
a. Contraction along a demand curve
b. Shift of the demand curve
c. Movement along a demand curve
d. Expansion along a demand curve
Q.2. A change in demand refers to
a. Contraction along a demand curve
b. Shift of the demand curve
c. Movement along a demand curve
d. Expansion along a demand curve
Q.3. If two goods are substitutes, the price elasticity of demand is
a. Negative
b. Positive
c. Zero
d. Not defined
Q.4 If two goods are complementary, the price elasticity of demand is
a. Negative
b. Positive
c. Zero
d. Not defined
Q.5. Price elasticity of demand is defined as
a. Absolute change in quantity demanded due to absolute change in price
b. Percentage change in quantity demanded due to percentage change in price
c. Relative change in quantity demanded due to change in price
d. Marginal change in quantity demanded due to marginal change in price
Q.6. Total revenue will increase if
a. Demand is elastic
b. Demand is inelastic
c. Demand is unitary elastic
d. None of the above
Q.7. An isoquant shows

 a. All combinations of labor and capital

b. All combinations of good X and good Y
c. All combinations of labor and capital
d. All combinations of labor and capital
Q.8. Changes in income are shown by
a. Parallel shift of isoquant
b. Movement along the budget line
c. Parallel shift of budget line
d. Both (b) & (c)
Q.9. When demand is price inelastic, total revenue is
a. directly related to quantity demanded
b. inversely related to quantity demanded
c. directly related to price
d. not related to either price or quantity demanded
Q.10. In case of inferior goods the income elasticity is
a. Positive
b. Negative
c. Zero
d. None of the above.
Q.11. An indifference curve is the locus of
a. All the combinations of good X and Y giving different level of satisfaction
b. All the combinations of capital and labor giving same level of output
c. All the combinations of good X and Y giving same level of satisfaction
d. All the combinations of capital and labor giving different level of output
Q.12. Short run in production function refers to
a. When all factors of production become variable
b. One factor of production varies keeping all other constant
c. When all factors of production become variable
d. None of the above
Q.13. Opportunity cost refers to
a. The expected return from the use of the resource
b. The expected return from the second best alternative use of the resource
c. Accounting cost less of unilateral transfers
d. None of the above
Q.14 Long run average cost curve is also known as
a. Envelope curve

b. Angel curve
c. Laffer curve
d. None of the above
Q.15. Internal economies of scale determine
a. The position of long run average cost curve
b. The shape of long run average cost curve
c. The shape of short run average cost curve
d. The position of short run average cost curve
Q.16. The nature and shape of AFC is
a. A rectangular Hyperbola
b. A horizontal Line
c. It is U shaped
d. A vertical Line
Q.17. Which one of the statement is correct
a. All costs are variable costs in the long run except LMC
b. TFC is inverse SShaped reflecting Laws of Returns.
c. Over a very long range of Operation, AFC is Zero.
d. None of the above is correct.
Q.18. Explicit cost is also known as
a. Imputed Cost
b. Implied Cost
c. Accounting Cost
d. Opportunity Cost
Q.19. The use of highly structured meeting agenda and restricted
discussion or interpersonal
communication during the decision making process is known as
a. Nominal Group Technique,
b. Brainstorming,
c. Delphi Group Technique,
d. Both (b) & (c)

Q.20. Variation in Data occurring due to regularly recurring fluctuations in

economic activity
during each year is
a. Cyclical fluctuations
b. Seasonal Variations
c. Random Variation
d. Irregular Variation
Q.21. In the short run the supply curve of a firm in perfectly competitive
market is
a. Average cost curve
b. Total cost curve
c. Marginal cost curve
d. None of the above
Q.2.2. A firm is price taker in perfect competition market structure
because
a. Single firm supplies significant part of total market supply
b. (b) Single firm supplies insignificant part of total market supply
c. Single firm supplies Homogeneous product
d. Both (b) and (c)
Q.23. Highest degree of allocative inefficiency is the feature of
a. Perfect competition
b. Monopoly
c. Oligopoly
d. Not defined
Q.24 Cartels and collusion are
a. Illegal activities
b. Legal framework
c. Authorized framework
d. Not defined
Q.25. As more labor is added to a fixed amount of input, the rate at which
output goes up begins
to decrease. This is called
a. Diminishing marginal utility.
b. Diminishing marginal productivity.
c. Diminishing marginal costs.
d. Diminishing marginal profit.
Q.26. If the cost of sugar rises and sugar is a major ingredient in jelly
beans, then the jelly bean

a. demand curve shifts to the left.

b. supply curve shifts to the left.
c. supply curve shifts to the right.
d. demand and supply curves both shift to the right.
Q.27.Which one of the following is not the characteristic of Perfect
Competition
a. All firms sell an identical product.
b. All firms are price takers.
c. All firms have a relatively small market share.
d. Buyers do not know the nature of the product being sold and the prices
charged by each
firm.
Q.28. Which one of the following is not the characteristic of demand
a. There should be the willingness to purchase
b. There should be the capacity to purchase
c. Specific time frame
d. Real market place is required
Q.29. For a normal good:
a. The price elasticity of demand is negative; the income elasticity of demand is
negative
b. The price elasticity of demand is positive; the income elasticity of demand is
negative
c. The price elasticity of demand is negative; the income elasticity of demand is
positive
d. The price elasticity of demand is positive; the income elasticity of demand is
positive
Q.30. which of the following is true?
a. If the marginal cost is greater than the average cost the average cost falls
b. If the marginal cost is greater than the average cost the average cost increases
c. If the marginal cost is positive total costs are maximised
d. If the marginal cost is negative total costs increase at a decreasing rate if output
increases
Q.31. If marginal cost is positive and falling:
a. Total cost is falling
b. Total cost is increasing at a falling rate
c. Total cost is falling at a falling rate
d. Total cost is increasing at an increasing rate
Q.32. To maximise sales revenue a firm should produce where:

a. Marginal cost is zero

b. Marginal revenue is maximised
c. Marginal revenue is zero
d. Marginal revenue equals marginal cost
Q.33. Normal profit occurs when:
a. Average revenue equals average variable cost
b. Marginal revenue equals marginal cost
c. Average revenue equals marginal cost
d. Average revenue equals average cost
Q.34 Barriers to entry:
a. Do not exist in monopoly
b. Cannot exist in oligopoly
c. Do not exist in monopolistic competition
d. Do exist in perfect competition
Q.35. Which best describes price discrimination?
a. Charging different prices for different products
b. Charging the same prices for different products
c. Charging the same prices for the same products
d. Charging different prices for the same products
Q.36. In perfect price discrimination:.
a. Consumer surplus is maximized
b. Consumer surplus is zero
c. Producer surplus is zero
d. Community surplus is maximized
Q.37. In perfect price discrimination:
a. The demand curve is the marginal cost curve
b. The average revenue equals the average cost
c. The marginal cost is the average cost curve
d. The demand curve is the marginal revenue
Q.38. If a few firms dominate an industry the market is known as:
a. Oligopoly
b. Competitively monopolistic
c. Duopoly
d. Monopolistic competition

Q.39. In case certain goods are not sold within a reasonable time, the
retailer pulls the price down, it is
known as
a. Adjustment pricing
b. Administered pricing
c. Mark-down pricing
d. Mark-up pricing
Q.40. This pricing strategy acts as a barrier to entry to new firms
a. Limit Pricing
b. Administered Pricing
c. Peak Load Pricing
d. Skimming Pricing