Managerial Economics

Managerial Economics
Q.1(a) Explian TR,MR and AR of a frim under perfect competition and imperfect competition
TR:
Total revenue is important to the analysis a perfectly competitive firm's short-run production decision. A perfectly
competitive firm generally seeks to produce the quantity of output that maximizes profit, which is the difference
between total revenue and total cost.
Total revenue can be represented in a table or as a curve. For a perfectly competitive firm, the total revenue curve is
a straight line that emerges from the origin. The total revenue received by a firm is price times quantity, often
expressed as this simple equation: TR = Price X Quantity
MR:
Marginal revenue is the extra revenue generated when a perfectly competitive firm sells one more unit of
output. It plays a key role in the profit-maximizing decision of a perfectly competitive firm relative to
marginal cost.
marginal revenue= change in total revenue
change in quantity
AR:
Average revenue is the revenue generated per unit of output sold. It plays a role in the determination of a perfectly
competitive firm's profit. Per unit profit is average revenue minus average (total) cost. A perfectly competitive firm
generally seeks to produce the quantity of output that maximizes profit.
Composed By: Adnan Hameed (aquariun143@yahoo.com) 0313-7788761

1
Ejaz Ahmad (ejaz_120@yahoo.com) 0322-6300626
Average revenue= total revenue
Quantity
In monopoly market situation the firm is identical to the market demand curve for the product. The difference
between firms under perfect competition and monopoly is from demand side only. In monopoly the demand for the
product of the firm is constitutes the total market demand of the commodity.
COMBINATIONS QUANTITY PRICE(AR) TOTAL REVENUE MARGINAL REVENUE
A 1 50 50 50
B 2 45 90 40
C 3 40 120 30
D 4 35 140 20
E 5 30 150 10
F 6 25 150 0
G 7 20 140 -10
H 8 15 120 -20
I 9 10 90 -30
J 10 05 50 -40

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(b)Describe Relationship between TR,MR and AR
Under perfect competition, TR is an upward sloping a straight line starting from the origin and rises at a constant
rate, i.e., proportional to increase in output. Here, AR and MR are identical and remain constant.
The relationship among AR, MR and TR in such case can be explained with the help of an imaginary schedule
(Table 12.3) and diagram (Fig. 12.6).
Table 12.3
Output AR TR
MR
(Q) or Price = AR x Q
l 5 0 -
2 5 10 5
3 5 15 5
4 5 20 5

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5 5 25 5
6 5 30 5
In the above table, we see that AR (or price) remains constant at Rs. 5 irrespective of the quantity
sold. The producer can obtain the same price for any quantity placed on the market. Since larger
quantities can be sold without the necessity of reducing the price, each additional unit sold adds
the same amount received for it to the total revenue of the producer.
There is no loss of revenue on the previous units. Thus, marginal revenue is identical with
average revenue at all quantity levels, i.e. MR=AR. This has been shown in Fig. 12.6. In this
figure, both AR and MR curve are parallel to the X- axis and coincide each other.
In this case, TR curve is a straight line curve starting from the origin with same slope Such kind
of relationship among AR, MR and TR is found in case of a producer operating in a perfectly
competitive market, discussed in next chapter on Pricing under Perfect Competition.
Q.2 Elucidate simple and multiple regression analysis
Simple linear regression is performed between one independent variable and one dependent variable. Multiple
regressions is performed between more than one independent variable and one dependent variable. Multiple
regression returns results for the combined influence of all IVs on the DV as well as the individual influence of each
IV while controlling for the other IVs. It is therefore a far more accurate test than running separate simple
regressions for each IV. Multiple regression should not be confused with multivariate regression, which is a much
more complex procedure involving more than one DV.
In addition to telling you the predictive value of the overall model, standard multiple regression tells you how well
each independent variable predicts the dependent variable, controlling for each of the other independent variables. In
our example, then, the regression would tell you how well weight predicted a person's height, controlling for gender,
as well as how well gender predicted a person's height, controlling for weight.

4
Example of simple linear regression, which has one independent variable
Q.3 (a) what is forecasting? Why it is so important in the management of business firms and
other enterprises?
Forecasting:
A planning tool that helps management in its attempts to cope with the uncertainty of the future, relying mainly
on data from the past and present and analysis of trends.
Forecasting starts with certain assumptions based on the management's experience, knowledge, and judgment.
A forecast should not be confused with a budget.
Importance:
The importance of business forecasting is that it can help to make your business more profitable. It does not entail
simple prediction, but rather analyzing information about your business, the economy, the market place and current
trends to prepare for your business’ future. First, it enables management to change operations at the right time in
order to reap the greatest benefit. It also helps the company prevent losses by making the proper decisions based on
relevant information. Forecasting is also important when it comes to developing new products or new product lines.
It helps management decide whether the product or product line will be successful. Forecasting prevents the
company from spending time and money developing, manufacturing, and marketing a product that will fail. In this
time of rapid change, accurate and timely forecasts have become even more important. Recognizing this is the first
step in becoming a successful organization.

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(b)What are the different types of forecasting?
There are two major types of forecasting, which can be broadly described as macro and micro:
Macro forecasting is concerned with forecasting markets in total. This is about determining the
existing level of Market Demand and considering what will happen to market demand in the future.
Micro forecasting is concerned with detailed unit sales forecasts. This is about determining a
product’s market share in a particular industry and considering what will happen to that market
share in the future.
(c) How can a firm determine the most suitable forecasting method to use?
Choose the Right Forecasting Method:
In virtually every decision they make, executives today consider some kind of forecast. many forecasting techniques
have been developed in recent years. Each has its special use, and care must be taken to select the correct technique
for a particular application. The selection of a method depends on many factors—the context of the forecast, the
relevance and availability of historical data, the degree of accuracy desirable, the time period to be forecast, the cost/
benefit (or value) of the forecast to the company, and the time available for making the analysis. for example, the
forecaster should choose a technique that makes the best use of available data. If the forecaster can readily apply one
technique of acceptable accuracy, he or she should not try to “gold plate” by using a more advanced technique that
offers potentially greater accuracy but that requires nonexistent information or information that is costly to obtain.
Q.4 (a) What are the trend projections?
Trend projection:
Trend Projection: When numerical data are available, a trend can be plotted on graph paper to show changes through
time. If desired, the trend line can then be extended or "projected" into the future on the basis of the recent rate of
change. Such a projection shows where the trend should be at some point in the future assuming there is no shift in
the rate of change. Example: A population with a steady 2 percent rate of annual growth will double in about thirty-
five years.It means basically that a prediction is being made in advance for a particular trend. The trend may be the
purchasing of certain products, public reactions, new fads, etc.
(b) What does a liner trend measure? What is the other most common trend from used in time series
analysis? What does this show? Which is better?
Measures of Linear Trend
Pearson Correlation, r, describes a linear association between two interval variables. This is one of the most
common measures of linear trend. If Y and Z both are ordinal variables, then
R = cov(Y,Z)
sYsZ

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Properties of r for contingency tables
−1 ≤ r ≤ 1
r = 0 corresponds to no (linear) relationship
r = ±1 implies perfect association i.e., all observations fall into the diagonal cells. This is well defined only when the
contingency table is a square table.
has a very limited use for highly discrete and unbalanced data (e.g., large discrepancies in the cell sizes).
appropriate only when both variables can be considered ordinal.
Most Common Trends in Time series:
Time series can be classified into two different types: stock and flow.
A stock series is a measure of certain attributes at a point in time and can be thought of as “stocktakes”. For
example, the Monthly Labour Force Survey is a stock measure because it takes stock of whether a person was
employed in the reference week.
Flow series are series which are a measure of activity over a given period. For example, surveys of Retail
Trade activity. Manufacturing is also a flow measure because a certain amount is produced each day, and then these
amounts are summed to give a total value for production for a given reporting period.
The main difference between a stock and a flow series is that flow series can contain effects related to the calendar
(trading day effects). Both types of series can still be seasonally adjusted using the same seasonal adjustment
process.
(c) Why might a forecast obtained by projecting past trend into the future give poor results
even if past patterns remain unchanged?
Trends Projection Method:
Trend projection method is a classical method of business forecasting. This method is essentially concerned with the
study of movement of variable through time. The use of this method requires a long and reliable time series data.
The trend projection method is used under the assumption that the factors responsible for the past trends in variables
to be projected (e.g. sales and demand) will continue to play their part in future in the same manner and to the same
extend as they did in the past in determining the magnitude and direction of the variable.
There are three (3) techniques of trend projection based on time – series data.
Graphical Method
Fitting Trend Equation

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Double log trend equation of equation
Q.5 (a) Explain followings
(i) Short run and long run costs
The long run is the conceptual time period in which there are no fixed factors of production as to changing the
output level by changing the capital stock or by entering or leaving an industry. The long run contrasts with
the short run, in which some factors are variable and others are fixed, constraining entry or exit from an industry. In
macroeconomics, the long run is the period when the general price level, contractual wage rates, and expectations
adjust fully to the state of the economy, in contrast to the short run when these variables may not fully adjust.
(ii) Economic cost and Accounting cost
accounting costs (explicit costs) vs. economic costs: The real (economic) costs of production usually exceed the
accounting (bookkeeping) costs of production because economic costs include both explicit accounting costs and
implicit costs – the value of the personal resources the owners of a firm make available (e.g., their labor and capital).
(iii) Sunk cost and incremental cost
Sunk cost are the costs that are not altered by the change in factors like depreciation. Most business decisions
require cost estimates that are essentially incremental and costs that are not altered by the contemplated change are
sunk and irrelevant.
Incremental costs are not necessarily variable, traceable, or cash costs. In many short-run problems, the most
important incremental cost is the foregone opportunity of using strictly limited facilities in their present work, rather
than shifting them to a new activity.
(iv) Implicit cost and explicit cost
explicit costs are "out of the pocket" expenses that a firm must make to outsiders for resources.
implicit costs are the cost of using your resources; the ones you already have.
(v)Learning curve
A Learning Curve is a graphical representation of the increase of Learning (Vertical axis) with Experience
(Horizontal axis).
A learning curve expressed as a mathematical function.

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Q.7 (a) What is meant by production function?
In economics, a production function relates physical output of a production process to physical inputs or factors of
production. The primary purpose of the production function is to address allocative efficiency in the use of factor
inputs in production and the resulting distribution of income to those factors, while abstracting away from the
technological problems of achieving technical efficiency, as an engineer or professional manager might understand
it.
(b) Explain returns to scale along with case study
returns to scale and economies of scale are related terms that describe what happens as the scale of production
increases in the long run, when all input levels including physical capital usage are variable (chosen by the firm).
(c) Describe Cobb-Douglas production function
In economics, the Cobb–Douglas production function is a particular functional form of the production function,
widely used to represent the technological relationship between the amounts of two or more inputs, particularly
physical capital and labor, and the amount of output that can be produced by those inputs.
Formulation
In its most standard form for production of a single good with two factors, the function is

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where:
Y = total production (the real value of all goods produced in a year)
L = labor input (the total number of person-hours worked in a year)
K = capital input (the real value of all machinery, equipment, and buildings)
A = total factor productivity
α and β are the output elasticity of capital and labor, respectively. These values are constants determined by
available technology.
Q.8 (a) How law of diminishing returns is reflected in the shape of total product cuvre
Diminishing returns (also called diminishing marginal returns) is the decrease in the marginal (per-unit) output of a
production process as the amount of a single factor of production is increased, while the amounts of all other factors
of production stay constant.
It should be noted that the server does not reset diminishing returns after exactly 15 seconds. Instead, it checks every
5 seconds if there are any diminishing returns that should be reset because the last spell in their category was cast on
the target more than 15 seconds ago. As a result, a particular diminishing return category may take anywhere
between 15 and 20 seconds to reset. Most add-ons guess that a DR category has reset after 18 seconds by default.
(b) What is relationship between diminishing returns and the stages of productions?
Short-run production by a firm typically encounters three distinct stages as larger amounts of a variable input
(especially labor) are added to a fixed input (such as capital). The first stage results from increasing average product.
The second stage sets it at the peak of average product, experiencing a wide range of decreasing marginal returns,
and the law of diminishing marginal returns. The third stage is then characterized by negative marginal returns and.

10
The three short-run production stages are conveniently labeled I, II, and III.
Stage I
Consider these observations about the shapes and slopes of the three product curves in Stage I.
 The total product curve has a positive slope.
 Marginal product is greater than average product. Marginal product initially increases, the decreases until it
is equal to average product at the end of Stage I.
 Average product is positive and the average product curve has a positive slope.
Stage II
Most important of all, Stage II is driven by the law of diminishing marginal returns.
The three product curves reveal the following patterns in Stage II.
 The total product curve has a decreasing positive slope. In other words, the slope becomes flatter with each
additional unit of variable input.
 Marginal product is positive and the marginal product curve has a negative slope. The marginal product
curve intersects the horizontal quantity axis at the end of Stage II.
 Average product is positive and the average product curve has a negative slope. The average product curve
is at its a peak at the onset of Stage II. At this peak, average product is equal to marginal product.
Stage III
In this stage of short-run production, the law of diminishing marginal returns causes marginal product to decrease so
much that it becomes negative.

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 The total product curve has a negative slope. It has passed its peak and is heading down.
 Marginal product is negative and the marginal product curve has a negative slope. The marginal product
curve has intersected the horizontal axis and is moving down.
 Average product remains positive but the average product curve has a negative slope.
Q.9 (a) What is meant by innovation? What are the different types of innovations?
Innovation can take many different forms. It could mean finding more cost effective ways of doing things, adding
additional dimensions to existing business products or services or accessing new markets.
An innovation project should add value to the business, helping it to improve competiveness and profitability.
Innovation as an organized practice falls into four categories:
Basic Research: This is the type of work done at universities and some R&D labs. There isn’t a clearly defined
outcome. Basic research pays huge dividends in the long term and it’s difficult to imagine our modern world without
discoveries which seemed useless at the time.
Sustaining Innovation: This is the type of innovation that Apple excels at, where there is a clearly defined problem
and a reasonably good understanding of how to solve it. Those were difficult problems that took a few years to
solve, but it was pretty clear what was involved and who was capable of solving them.
Disruptive Innovation: Clayton Christensen introduced the concept of disruptive innovation in his classic book
The Innovator’s Dilemma. These tend to be new approaches to old products and services.
Breakthrough Innovation: Thomas Kuhn called this “revolutionary science” because it involves a paradigm shift.
Transistors and the discovery of the structure of DNA are both good examples of breakthrough innovation.
(b) What are some factors that determine the rate at which a firm introduces innovations?
Diffusion of Innovations is a theory that seeks to explain how, why, and at what rate new ideas and technology
spread through cultures. Diffusion of Innovations manifests itself in different ways in various cultures and fields and
is highly subjective to the type of adopters and innovation-decision process.
There are four main elements that influence the spread of a new idea: the innovation, communication channels,
time, and a social system.
Innovation: Rogers defines an innovation as "an idea, practice, or object that is perceived as new by an individual
or other unit of adoption
Communication channels: A communication channel is "the means by which messages get from one individual to
another".

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Time: "The innovation-decision period is the length of time required to pass through the innovation-decision
process". "Rate of adoption is the relative speed with which an innovation is adopted by members of a social
system".
Social system: "A social system is defined as a set of interrelated units that are engaged in joint problem solving to
accomplish a common goal".
(c) What is meant by the closed and open innovation modles?
CLOSED INNOVATION
No new Technologies and Ideas outside of firm

Competitors could not take benefits
More beneficial to company
OPEN INNOVATION
Open Innovation Is the process of doing new things with outsiders that deliver value
Combining internal and external ideas
Open Innovation is a term promoted by Henry Chesbrough
Permeable boundaries
Q.10 (a) Describe Ridge lines and iso-quont curve
Ridge lines and Iso Quants:
Ridge lines is a concept in Micro Economics related to Iso-quants (which shows different combination of inputs for
the same level of output). However, after a certain point Iso-quant begins to slope upward, if there are 2 or more
isoquants then there would be similar points on the other iso-quants too... on joining these points, you get the ridge
lines.
Note: the point from where Iso-quant slopes upward is a point where the marginal product of one of the input is
negative.
Isocost curves and Expansion Path
A graph of all possible combinations of inputs that result in the production of a given level of output. Used in the
study of microeconomics to measure the influence of inputs on the level of production or output that can be

13
achieved.
< Production Isoquant/Isocost Curve
(b) Explain Optimum Factor Combination when 1-one input factor is variable 2- more input factors are
variable.
Optimum Factor Combination:
Definition:
The least cost combination or the optimum factor combination refers to the combination of factors with
which a firm can produce a specific quantity of output at the lowest possible cost. Explanation:
There are two methods of explaining the optimum combination of factor:
(i) The marginal product approach.
(ii) The isoquant / isocost approach.
(i) The Marginal Product Approach:
When a firm uses different factors of production or least cost combination or the optimum combination of
factors is achieved when:
Formula:
Mppa = Mppb = Mppc = Mppn
Pa Pb Pc Pn
In the above equation a, b, c, n are different factors of production. Mpp is the marginal physical product.
(ii) The Isoquant / Isocost Approach:
The least cost combination of factors for any level of output is that where the iso-product curve is tangent
to an isocost curve. The analysis of producers equilibrium is based on the following assumptions.

14
Assumptions of Optimum Factor Combination:
The main assumptions on which this analysis is based areas under:
(a) There are two factors X and Y in the combinations.
(b) All the units of factor X are homogeneous and so is the case with units of factor Y.
(c) The prices of factors X and Y are given and constants.
(d) The total money outlay is also given.
(e) In the factor market, it is the perfect completion which prevails. Under the conditions assumed above, the
producer is in equilibrium, when the following two conditions are fulfilled.
(1) The isoquant must be convert to the origin.
(2) The slope of the Isoquant must be equal to the slope of isocost line.
Thus we find that at point Q, the two conditions of producer's, equilibrium in the choice of factor combinations, are
satisfied.
(1) The isoquant (IP) is convex the origin.
(2) At point Q, the slope of the isoquant ΔY / ΔX (MTYSxy) is equal to the slope of the isocost in Px / Py. The
producer gets the optimum output at least cost factor combination.

15

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Managerial Economics

Composed By: Adnan Hameed (aquariun143@yahoo.com) 0313-7788761

Average revenue= total revenue

COMBINATIONS QUANTITY PRICE(AR) TOTAL REVENUE MARGINAL REVENUE

Composed By: Adnan Hameed (aquariun143@yahoo.com) 0313-7788761

(b)Describe Relationship between TR,MR and AR

Composed By: Adnan Hameed (aquariun143@yahoo.com) 0313-7788761

Q.2 Elucidate simple and multiple regression analysis

Composed By: Adnan Hameed (aquariun143@yahoo.com) 0313-7788761

Example of simple linear regression, which has one independent variable

Composed By: Adnan Hameed (aquariun143@yahoo.com) 0313-7788761

(b)What are the different types of forecasting?

Choose the Right Forecasting Method:

Q.4 (a) What are the trend projections?

Measures of Linear Trend

Composed By: Adnan Hameed (aquariun143@yahoo.com) 0313-7788761

Properties of r for contingency tables

r = 0 corresponds to no (linear) relationship

appropriate only when both variables can be considered ordinal.

Most Common Trends in Time series:

Trends Projection Method:

Fitting Trend Equation

Composed By: Adnan Hameed (aquariun143@yahoo.com) 0313-7788761

Double log trend equation of equation

Q.5 (a) Explain followings

(i) Short run and long run costs

(ii) Economic cost and Accounting cost

(iii) Sunk cost and incremental cost

(iv) Implicit cost and explicit cost

A learning curve expressed as a mathematical function.

Composed By: Adnan Hameed (aquariun143@yahoo.com) 0313-7788761

Q.7 (a) What is meant by production function?

(b) Explain returns to scale along with case study

(c) Describe Cobb-Douglas production function

Composed By: Adnan Hameed (aquariun143@yahoo.com) 0313-7788761

Y = total production (the real value of all goods produced in a year)

L = labor input (the total number of person-hours worked in a year)

A = total factor productivity

Composed By: Adnan Hameed (aquariun143@yahoo.com) 0313-7788761

 The total product curve has a positive slope.

Composed By: Adnan Hameed (aquariun143@yahoo.com) 0313-7788761

Innovation as an organized practice falls into four categories:

Composed By: Adnan Hameed (aquariun143@yahoo.com) 0313-7788761

(c) What is meant by the closed and open innovation modles?

No new Technologies and Ideas outside of firm

Q.10 (a) Describe Ridge lines and iso-quont curve

Ridge lines and Iso Quants:

Isocost curves and Expansion Path

Composed By: Adnan Hameed (aquariun143@yahoo.com) 0313-7788761

< Production Isoquant/Isocost Curve

Optimum Factor Combination:

There are two methods of explaining the optimum combination of factor:

(i) The marginal product approach.

(ii) The isoquant / isocost approach.

(i) The Marginal Product Approach:

Mppa = Mppb = Mppc = Mppn

(ii) The Isoquant / Isocost Approach:

Composed By: Adnan Hameed (aquariun143@yahoo.com) 0313-7788761

Assumptions of Optimum Factor Combination:

The main assumptions on which this analysis is based areas under:

(a) There are two factors X and Y in the combinations.

(c) The prices of factors X and Y are given and constants.