Group A:

Attempt any two questions:

1. A manufacturing company has demand function: P=2000-10Q, and total cost
function: TC= 1000+200Q.
What output Q maximizes sales aNd what are the corresponding values of price (P),
profits(p) and total revenue of the firm under the objective of profit maximization
and sales revenue maximization subject to a profit constraint of Rs. 79,500.
Answer:
Given,
P= 2000-10Q Demand function
TC=1000+200Q Cost function
Profit (π) = TR-TC
= P. Q – TC
= Q (2000-10Q) – 1000 -200Q
=-10Q² + 1800Q -1000

For profit maximization,

𝑑π/𝑑𝑞 = 0 1st order condition
or, d/dQ (1800Q -10Q² -1000) =0
or, 1800 – 20Q = 0
or, Q = 90 units.
Output = 90 units.
Price (P) = 2000- 10 Q
= 2000 – 10 (90)
= Rs. 1100
Profit (π) = -10 (90) ² + 1800 (90) – 1000
= 80,000.
Total revenue (TR) = P.Q
= 1100 (90)
= 99,000.
▪ Sales revenue maximization with profit constraint of Rs. 79,500.

π = 1800 Q -10 Q² - 1000

or, -10Q² + 1800Q -1000 = 79500
or, -10Q² + 1800Q – 80500 = 0.
Determining the value of Q,

Thus, Q = 97.07 and 82.93

When Q = 97.07
TR = 2000 * 97.07 – 10 (97.07)²
=699914.15

When Q= 82.93
TR = 2000 * 82.93 – 10(82.93)²
= 97086.15

Since total revenue is maximun at Q= 97.07 units the required output is 97 units.

2. From the production function given:

Q= 20K0.5L0.5Where Q= output, K= capital and L= labour
a) Compute the marginal product of capital (MPk) and marginal product of
labour (MPl)
b) If the price of capital is Rs. 5 per unit and price of labour is Rs. 4 per unit,
determine the expansion path for the firm.
c) The firm is currently producing 200 units of output per period, using rate of
L= 4 and k= 25. Is this an efficient combination?
Answer:
Given,

Production function, Q= 20K0.5 L0.5

a. MPk= dQ/dK
= 20 L0.5(0.5) K -0.5
= 10 (L/K)0.5
MPl = dQ/dL
= 20K0.5 * 0.5L0.5
= 10 (K/L) 0.5
b. Price of capital (r) = Rs. 5/unit
price of labour(w) = Rs. 4/unit
Expansion path is defined as the locus of optimum input combination and
is given by the following formula.

MPl/ MPk = w/r

or, MPl/ MPk = 4/5
or, 10 (K/L) 0.5 / 10 (L/K)0.5 = 4/5
 or, K/L = 4/5
or, K= 4/5L ................ (i) This is the required expansion path of firm.

c. Current production = 200 units

w= Rs. 4
r = 25

Q = 20K0.5 L0.5

If Q = 200
then,
200 = 20K0.5 L0.5
or, 200 = 20 (4/25 L)0.5 L0.5 (where, k = wl/r)
or. L= 25

and, K = 4/25 * 25
=4

Therefore, the efficient combination for producing 200 units is L= 25 and

K= 4.

Group B:
Attempt any four question:
4. If target profit is Rs. 6000 price per unit is Rs. 140 per unit variable cost is Rs. 60
and fixed cost is Rs. 40,000 find out the targeted quantity and revenue.
Answer:

Given,
Variable cost = Rs. 60/unit
fixed cost = Rs. 40000
Total cost (TC) = 60Q + 40000 ( Where Q is the output produced)
price per unit (P) = 140
target profit = Rs 6000/unit

We have,
profit (π) = 𝑇𝑅 − 𝑇𝐶
or, 6000- PQ – (60Q + 40000)
or, Q = 575.
 Required output = 575 units and
Targeted revenue = PQ
= 575 * 140
= Rs. 80500.

6. Distinguish between economic cost and accounting cost with example.

Answer:
Accounting costs are explicit costs, also referred to as hard costs, that include business
necessities like payroll, production costs and marketing budgets. Businesses can easily
track explicit costs because they include specific dollar amounts. Accounting costs
include anything a business spends, and you deduct them from revenues in an accounting
period. This means accounting costs are real money that leaves the bank each accounting
period and includes everything you spend to market, manufacture and deliver products.
You're required to determine accounting costs before you can calculate the accounting
profit.
For instance, if a business plans on opening a storefront in a new market, it may first
decide to make investments including hiring new employees, new computer software and
equipment, product inventory and rent. If the total amount spent on these features is
$400,000, that's the total accounting cost. Additional examples of accounting costs may
include:

● Raw materials and equipment

● Utilities and maintenance
● Rent or mortgage payments

To calculate accounting cost, we can add all business expenses together, such as:

● Manufacturing costs
● Labor
● Salaries
● Taxes
● Rent or mortgage

The formula for calculating accounting cost is:

(Manufacturing costs) + (Labor, salaries and taxes) + (Facility costs) + (Any additional
expenses) = Accounting cost
Economic costs include accounting costs and implicit costs, which are hypothetical expenses
used when making a business decision to forecast potential profit. This means that economic
costs include both explicit and implicit costs. Accountants and business leaders use economic
costs when creating financial projections or determining the best strategic outcome, such as
reallocating funds or using a more efficient mode of production. Economic costs allow
accountants to take into consideration both the explicit accounting costs and the hypothetical
costs of a potential business decision.

Economic costs are important for businesses because they help them determine long-term
strategies and summarize the company's actual and potential values. Business leaders can use
these economic costs to determine which markets to exit or enter and can give investors the
confidence that the company has reconfirmed long-term value. The benefit of economic cost
analysis is finding the difference in cost among business options. For example, if a business has
determined the accounting costs to open a storefront in a new market are $400,000, then
accounting costs may allow them to consider:

● What if they opened a storefront in a new market?

● What if they leased their storefront to another business once they purchased it?
● What if they invested the $400,000 into their original storefront rather than opening a
new one?

7. Explain and illustrate the concept of economics of scope.

Answer:
Economies of scope are the cost savings achieved by producing a range of products or services
together rather than producing them separately. In other words, it is the ability of a firm to lower
its average cost of production by producing multiple products or services using the same
resources.
An economy of scope means that the production of one good reduces the cost of producing
another related good. Economies of scope occur when producing a wider variety of goods or
services in tandem is more cost effective for a firm than producing less of a variety, or producing
each good independently. In such a case, the long-run average and marginal cost of a company,
organization, or economy decreases due to the production of complementary goods and services.
While economies of scope are characterized by efficiencies formed by variety, economies of
scale are instead characterized by volume. The latter refers to a reduction in marginal cost by
producing additional units. Economies of scale, for instance, helped drive corporate growth in
the 20th century through assembly line production.
Real-world examples of the economy of scope can be seen in mergers and acquisitions (M&A),
newly discovered uses of resource byproducts (such as crude petroleum), and when two
producers agree to share the same factors of production. 
Economies of scope are essential for any large business, and a firm can go about achieving such
scope in a variety of ways. First, and most common, is the idea that efficiency is gained through
related diversification. Products that share the same inputs or that have complementary
productive processes offer great opportunities for economies of scope through diversification.
Horizontally merging with or acquiring another company is another a way to achieve economies
of scope. Two regional retail chains, for example, may merge with each other to combine
different product lines and reduce average warehouse costs. Goods that can share common inputs
like this are very suitable for generating economies of scope through horizontal acquisitions.
For instance, assume that company ABC is the leading desktop computer producer in the
industry. Company ABC wants to increase its product line and remodels its manufacturing
building to produce a variety of electronic devices, such as laptops, tablets, and phones. Since the
cost of operating the manufacturing building is spread out across a variety of products, the
average total cost of production decreases. The costs of producing each electronic device in
another building would be greater than just using a single manufacturing building to produce
multiple products.

8 To what extent the kinked demand curve model helps in explaining price rigidity under
oligopoly.?
Answer:
In many oligopolist markets, it has been observed that prices tend to remain inflexible for a very
long time. Even in the face of declining costs, they tend to change infrequently. American
economist Sweezy came up with the kinked demand curve hypothesis to explain the reason
behind this price rigidity under oligopoly.
According to the kinked demand curve hypothesis, the demand curve facing an oligopolist has a
kink at the level of the prevailing price. This kink exists because of two reasons:

1. The segment above the prevailing price level is highly elastic.

2. The segment below the prevailing price level is inelastic.
The following figure shows a kinked demand curve dD with a kink at point P.
 From the figure, we know that

i. The prevailing price level = P

ii. The firm produces and sells output = OM
iii. Also, the upper segment (dP) of the demand curve (dD) is elastic.
iv. The lower segment (PD) of the demand curve (dD) is relatively inelastic.
This difference in elasticities is due to an assumption of the kinked demand curve hypothesis.

Assumption:
Each firm in an oligopoly believes the following two things:

a. If a firm lowers the price below the prevailing level, then the competitors will follow him.
b. If a firm increases the price above the prevailing level, then the competitors will not follow
him.
There is logical reasoning behind this assumption. When an oligopolist lowers the price of
his product, the competitors feel that if they don’t follow the price cut, then their customers will
leave them and buy from the firm who is offering a lower price.
Therefore, they lower their prices too in order to maintain their customers. Hence, the lower
portion of the curve is inelastic. It implies that if an oligopolist lowers the price, he can obtain
very little sales.
On the other hand, when a firm increases the price of its product, it experiences a substantial
reduction in sales. The reason is simple – consumers will buy the same/similar product from its
competitors.
This increases the competitors’ sales and they will have no motivation to match the price rise.
Therefore, the firm that raises the price suffers a loss and hence refrain from increasing the price.
This behavior of oligopolists can help us understand the elasticity of the upper portion of the
demand curve (dP). The figure shows that if a firm raises the price of a product, then it
experiences a large fall in sales.
Hence, no firm in an oligopolistic market will try to increase the price and a kink is formed at the
prevailing price. This is how the kinked demand curve hypothesis explains the rigid or sticky
prices.

End............................