Q-1 WHY IS THE UNDERSTANDING OF THE PRINCIPLE OF MANAGERIAL ECONOMICS NECESSARY FOR A BUSINESS MANAGER?

√ two reasons come to mind for me:

Many managers struggle with decision making on the margin (avoiding the sunk cost
fallacy)

It often is not clear just where a business actually makes money and loses money (cost
allocation underlies strategy and cross-subsidies can distort decision-making)

As humans, it is totally natural to consider sunk costs and to stray from homo
economies rational, marginal decision-making. So having some objective framework
really helps avoids natural biases. The hard part: over the long-run, every cost is variable
and there should be no ‘sunk cost’ effect. But folks tend to gloss over details in their
long-term planning but be very detailed for short-term planning. And in the short-run,
the temptation could be to say many costs are fixed/sunk and then change one’s
decisions accordingly. This is a path to going out of business. It is often not obvious just
which costs / cash flows are truly ‘incremental’ based on a given decision and given a
certain timeframe. Yet these determinations are CRITICAL in the evaluation of any big
decision. Any 22 year old can crank out an NPV model, but it takes smart, seasoned
decision-makers to really understand what is sunk / what is incremental / what
assumptions underlie the NPV model.

Regarding cross-subsidies, it is often really surprising the degree to which a given

business makes 100%+ of its profit with one segment/channel/location and then loses
x% of its’ profit everywhere else. If a competitor figures this out and poaches the sweet
spot business, one can be left with a money-losing enterprise. Think about newspapers
and classifieds (vs. online competitors); hospitals and imaging procedures (vs. MRI
clinics), etc. The approach towards cost allocation is what drives this- and many times
there are biases in cost allocation that benefit the largest divisions of a company and
distort the ‘true’ economics. Eventually, companies who engage in systematically
kidding themselves as to which customers and products are profitable vs. which are not
will be attacked by competitors who take an objective view and then tailor their
pricing/service model / product quality accordingly

Q-2 DISCUSS ON THE PRACTICAL APPLICATION OF THE ELASTICITY CONCEPT?

√
Q-3 DESCRIBE DEMAND FORECASTING ISSUES (WHAT,WHY,AND HOW)

√It is a method which helps to predict the demand of an organization's product in the future. It is a
series of steps which are useful to anticipate the future demand which are influenced by factors which
can be controlled or non-controlled.

As the scene in business is very unpredictable and uncertain it is best to take decision with forecasting
techniques. It can be classified into different methods such as qualitative assessment, quantitative
assessment, time series and casual methods. All of these are subdivided based on the firm, the term of
the project, the type of product, etc.

This method helps in the organization to take decision sin different situations such as;

• To plan and schedule the manufacturing and acquiring of the input.

• Making financial arrangements.

• The pricing strategy formulation.

• Advertisement planning and implementation.

Steps involved in demand forecasting:

• The objective is specified.

• The time perspective is determined.

• Determining the forecasting method.

• Collecting the data and making required adjustments.

• Estimate and interpret the results.

Advantages:

• It helps in the effective scheduling of the supply chain.

• Labor management is made easy.

• It helps to channelize the proper flow of cash.

• It makes budgeting more accurate.

• The costs associate in the production and distribution is controlled by proper means.

• The tracking of sales becomes easy.

• They can also be used to track the overall performance.

Q-4 EXPLAIN GAME THEORY AND ITS MAIN TYPE

√ Oxford Concise Dictionary of Politics defines game theory in the following words: “A game is
any situation in which the outcomes (pay offs) are, the product of the interaction of more than
one rational player. The term therefore includes not only games in the ordinary sense, such as
chess and football, but an enormously wide range of human interactions”. Another scholar
defines it as “a body of thought dealing with rational decision strategies in situations of conflict
and competition, when each participant or player seeks to maximize games and minimize
losses”.

Types of Game Theory

1: Zero-Sum Games

The profounder of game theory have devised different types of theory of games and the most
common form is zero-sum games of two persons. The game is played by two persons and this is a very
simple type of game. Chess, bridge and poker fall in this category. In the two-person game it is played by
two men only. Naturally, if one person gains the other person will incur loss. So what is gain to one may
be loss to the other.

2: Symmetric and Asymmetric Games:

In symmetric games, strategies adopted by all players are same. Symmetry can exist in
short-term games only because in long-term games the number of options with a player
increases. The decisions in a symmetric game depend on the strategies used, not on the players of
the game. Even in case of interchanging players, the decisions remain the same in symmetric
games. Example of symmetric games is prisoner’s dilemma.

On the other hand, asymmetric games are the one in which strategies adopted by players are
different. In asymmetric games, the strategy that provides benefit to one player may not be
equally beneficial for the other player. However, decision making in asymmetric games depends
on the different types of strategies and decision of players. Example of asymmetric game is entry
of new organization in a market because different organizations adopt different strategies to enter
in the same market.
 3: Cooperative and Non-Cooperative Games

Cooperative games are the one in which players are convinced to adopt a particular
strategy through negotiations and agreements between players. Let us take the example cited in
prisoner’s dilemma to understand the concept of cooperative games. In case, John and Mac had
been able to contact each other, then they must have decided to remain silent. Therefore, their
negotiation would have helped in solving out the problem.

Another example can be cited for pan masala organizations. Suppose pan masala organizations
have high ad-expenditure that they want to reduce. However, they are not sure whether other
organizations would follow them or not.

4 : Normal Form and Extensive Form Games:

Normal form games refer to the description of game in the form of matrix. In other words, when
the payoff and strategies of a game are represented in a tabular form, it is termed as normal form
games. Normal form games help in identifying the dominated strategies and Nash equilibrium. In
normal form games, the matrix demonstrates the strategies adopted by the different players of the
game and their possible outcomes.

On the other hand, extensive form games are the one in which the description of game is done in
the form of a decision tree. Extensive form games help in the representation of events that can
occur by chance. These games consist of a tree-like structure in which the names of players are
represented on different nodes.

5:

Simultaneous Move Games and Sequential Move Games:

Simultaneous games are the one in which the move of two players (the strategy adopted by two
players) is simultaneous. In simultaneous move, players do not have knowledge about the move
of other players. On the contrary, sequential games are the one in which players are aware about
the moves of players who have already adopted a strategy.

However, in sequential games, the players do not have a deep knowledge about the strategies of
other players. For example, a player has knowledge that the other player would not use a single
strategy, but he/she is not sure about the number of strategies the other player may use.
Simultaneous games are represented in normal form while sequential games are represented in
extensive form.

Q-5, After reading the following case report, answer the questions that follow
(1)IDENTIFY THE MAIN FACTORS AFFECTING THE DEMNAD FOR m&s product
One of the main factors is the worse of the first-ever TV ads. Its TV ads not only
met with an embarrassed titter but BBC’s Watchdog programme
savagedM&S for overcharging and poor quality in its range of garments.
Second, M&Slosses a lot of customers because of changing in taste of
consumers. This isbecause many of parents want to dress like their kids. Next,
M&S is the prefect c o mp e t i t i o n ma r k e t b e c a u s e t h i s in d u s t r y h a s
mo r e c o mp e t i t i v e . M & S ’s makeover looks like stuck in the past compared
with jazzy store layouts of rivals s u c h a s G a p o r H e n n e s & M a u r i t z s o
i t h a s b e e n u n a b l e t o r e s p o n d t h i s competitive challenge.