ASSIGNMENT – MANAGERIAL ECONOMICS

Instruction: Certain real-life situations have been provided below, followed by questions and
alternatives related to concepts from economics discussed in the class. You are supposed to
identify the alternative that is MOST SUITABLE to explain the situation. Each question carries one
mark. You may take a print of the assignment paper, mark your choices, and upload them in the
Assignment section of the e-learn portal.

Read the case given below and answer the questions that follow.

Furniture House

Sitting on the lawn of his palatial building in Durg, a relatively modest town near Raipur in
Chhattisgarh, Mr. Raman Singh reminisced about his past. He was wealthy beyond his
wildest dreams. His family ran the hugely successful Furniture House, a company with
hundreds of stores manufacturing and selling a house and office furniture across major cities
of the country. He was giving an interview to a reporter from a leading financial daily.
"There was nothing in this part of the country when I started up as a young boy. I was barely
educated, and the only work I knew was carpentry. I started with a shop making tables and
chairs. It was my showroom, my workshop, and also my house. I lovingly called it "Furniture
House."
The store also doubled as a workshop, where I worked late at night and dawn when
customers were not around, cleared the place up, and converted it to a showroom during
the day. The initial work was hard. The business was in its infancy, and we barely used to sell
15 chairs monthly. It was a challenging task for me to make them alone. Things became
smoother as I took in two other carpenters. We set up a good team work which has lasted
till today. The business started inching up. With more customers, we started getting better
discounts from our suppliers. The rent of the workshop/showroom got spread over a larger
volume of business, and we could now sell out chairs at a more reasonable price and take
home some profit.
That is when I got my big break. In the early sixties, the Government of India decided to set
up a steel plant near Bhilai. The steel plant needed a lot of chairs, tables, and furniture. They
wanted to use a local vendor to avoid the cost of transportation. I happened to
communicate with a senior manager who had bought a chair from me earlier and offered to
supply furniture at a competitive rate. And Lo behold, I had an enormous order in my hands.

My trouble had just started. I soon found that our local market did not have sufficient raw
materials, and I had to travel to Raipur and Nagpur to source them. The cost was now
significantly more, and the price I had quoted could not support it. I had to go back to the
Steel Plant's management and ask them to revise the price. The manager threw a fit at me
but ultimately agreed; I delivered the order on time without compromising on quality
though my margins were much lower.

"Bhilai Steel Plant set me up on my business. During the sixties, we built hundreds of
quarters for their employees, and I got most of that contract. The margins were always razor
 thin, but the volume made us a neat profit. We set up a furniture manufacturing unit at
Nehru Nagar, on the outskirts of Bhilai."

"This business of manufacturing is a tricky one. My benefactors at Bhilai Steel Plant knew I
was doing well. Many of them constantly troubled me to employ someone or the other from
their friend circle. Since I was getting good business from Bhilai, I could not deny such a
request. Soon my factory was full of people. They formed an employee union and did
everything possible to push me into tricky corners. There were fights between the so-called
union leaders, and often I would be forced to settle their disputes, distribute money and get
the factory going."

"This experience changed our management outlook. I have always been comfortable with
people, and even today, I consider it a pleasure to sign an appointment letter. But my
children are more careful with people. They believe in automation and technology. We have
just set up a factory in Chandigarh, for which my son brought in manufacturing experts from
Japan. The factory has an entirely automated line managed with robotics."

"However, I am a little skeptical about all this heavy technology push. In our search for
automation, we have reached a point where its ability to replace labor has got seriously
limited. Our Chandigarh factory employs costly engineers only to keep the robots in working
conditions. I joke with my son that with the money spent on maintaining the robots, we
could have employed people to produce more goods.

"These days, making profits has become more complex. Competition has arrived in a big
way. We have other furniture stores selling the same items. Gone are those days when I was
the only chair–maker in Bhilai, could charge the price I wanted, and made handsome profits.
These days, when competition sees you making a profit, they also make beelines for the
market. This sets into motion a dynamic that raises local costs and depresses prices, thus
eating into profits. That apart, we have the Chinese to deal with. Luckily, they are not in the
wooden furniture business. We had a small set-up where we manufactured furniture locks
for our internal consumption and the open market. We had to get out of that business when
the Chinese locks flooded the market with prices lower than the cost of materials for our
locks."

In the following questions, you shall find an event from the case and four economic
concepts. Choose the idea that most accurately describes the situation.

1. Mr. Singh had problem managing costs for the order from Bhilai Steel Plant at the beginning
of his career.
a. He ignored the hockey-stick nature of marginal costs and how Average Total Cost
declines first and then rises. His first quotation was based on the lower Average
Total Costs during the phase of operation where MC was below ATC.
b. He ignored the phenomenon of long-run average costs. 
c. He did not have sufficient volume to minimize his costs.
d. None of the above.
2. Mr. Singh had problems with employee unions and strikes in his first factory in Bhilai.
a. Mr. Singh's factory had excess employees operating beyond the economic ridge.
 b. Mr. Singh had employed too much capital in the factory.
c. Mr. Singh's factory was operating in stage III of production, and its marginal
productivity had turned negative.
d. a & c 
3. Mr. Singh observes that making money in this market has become difficult.
a. Mr. Singh is a monopolist who is facing customer resistance.
b. Mr. Singh operates in a perfect competition market where no firm can make super-
normal profits.
c. Mr. Singh's business operates in a monopolistic competition that affects the market
prices and costs so that no firm would make super-normal profits in the long run. 
d. None of the above
4. Mr. Singh points out that replacing labor with technology is becoming increasingly difficult.
a. The Marginal Rate of Technical Substitution (MRTS) increases as we start
substituting more labor with capital.
b. The Marginal Rate of Technical Substitution (MRTS) decreases as we start
substituting more labor with capital. 
c. The Marginal Rate of Technical Substitution (MRTS) remains constant as we start
substituting more labor with capital.
d. The Marginal Rate of Technical Substitution (MRTS) first decreases and then
increases as we start substituting more labor with capital.
5. Mr. Singh closed down his furniture lock business.
a. The Chinese locks had better quality and hence found better market acceptance.
b. The lock market was known for its low price elasticity.
c. The increased income of customers made them go for Chinese locks, a superior
product.
d. The Chinese locks were priced below the unit variable cost of locks manufactured by
Mr. Singh. The business had reached the shut-down point. 
Questions 6 to 15 are not related to the above case.

6. The fruit seller smiled at the young student's question. The earnest-looking young man was
doing his MBA dissertation project on customer behavior and was interviewing the fruit
seller to understand how a micro-business ensured customer satisfaction. The fruit business
in his part of the country was known for its erratic supply.
"How do you ensure customer satisfaction when either apple or orange is in short supply?"
"Well, Sir," the seller replied, "you seem to forget that customer satisfaction is also linked to
price. We raise the item's price in short supply, ensuring the customer seeks satisfaction
from the other product. That settles the issue."
Assertion 1: The change in price shifts the customer's budget line. The budget line now
touches the customer's indifference curve at a different point.
Assertion 2: The new point of tangency (where the new budget line meets the customer's
indifference curve) is one where the quantity of the more expensive fruit is lower.
a. Both Assertion 1 and Assertion 2 are correct and sufficiently explain the fruit seller's
point.
 b. Both Assertions are wrong; however, the fruit seller's point is correct.
c. The fruit seller's point is correct, but the assertions are wrong. 
d. The fruit seller's point is wrong, but the assertions are correct.
7. As they conversed, the fruit seller asked the student about ways to improve his business.
The student learned that apart from the price at which he brought the fruits, the seller
incurred some waste which was his second most crucial cost source. The more he sought to
scale up his business by stocking fruit, the more he had to deal with wastage which pushed
up his costs. At the same time, the higher stock typically decreased the market price. Often,
he was forced to sell off goods at discounted prices to avoid them from going stale and
becoming inedible.
a. The seller had erred in understanding economies of scale.
b. The seller had erred by operating outside the ridge of economics. 
c. The seller had erred by not capturing the dynamics of Marginal Revenue and
Marginal Cost and finding the sweet spot where both are equal.
d. The seller had made a wrong application of the law of equi-marginal utility.
8. The student advised him to relook at his choice of fruits. "The economics of the city is
changing. People are more affluent and interested in healthier and more exotic options.
Consider stocking organic fruits which are cultivated without insecticides. Look for fruits like
tangerine, avocado, strawberry, and the like. Many people in the city buy them online as
they are unavailable with sellers like you.
a. The student's advice is about income elasticity of demand.
b. Organic fruits, tangerines, avocados, and strawberries are superior products.
c. Both a & b are correct. 
d. None of the above
9. The student also advised him to move forward on the value chain. "Why don't you consider
setting up a store selling fruit juice." He said. "You sell a piece of apple for Rs. 10. The same
piece would fetch you Rs. 40 if you process it in a juicer and sell the resultant liquid. The
same piece would fetch you Rs. 100 when mixed with some milk costing about Rs. 20 and
served as Apple Shake." The fruit seller shook his head. "Yes, I tried that business. I took a
shop for rent at the local market. However, the shop's rent was prohibitive, and even with
the prices you are mentioning, I could not meet the costs." Which of the following points
best describes the situation?
a. The shop rent pushed up the fixed costs of his juice venture and significantly
increased the break-even point. 
b. The shopkeeper failed to manage productivity at the juice center as he had no
experience in the field.
c. The shop was operating outside the zone of economic production.
d. The juice shop had a low Marginal Rate of Technical Substitution.
10. The student discussed the issue with his Professor. The student told the Professor he wanted
to suggest to the fruit seller to start small. "He should have started with a juicer on a push
cart. The shop weighed him down." The Professor gave him a knowing smile. "But, Sir," the
student asked, "How do you explain this in terms of economic theory?" "The fruit seller told
me that the cost of operating a pushcart was higher. It wasn't easy to get a source of
electricity. Using a battery or a generator had cost implications. He was unwilling to use a
manual juicer". "That is true." Still, the cost would have been lower than that of a shop. The
shop would certainly operate at the lowest price. But that low cost would come at a much
 higher volume. Your fruit seller may not have the capital to stay the course for that long. He
is better off starting with a push cart and a battery-operated juicer. If a standard juice store
is not nearby, he can sell his product at a slightly higher price and make a reasonable
margin."
Which of the following concepts best describes the economics in the above context?
a. The Long Run Average cost (LRAC) curve describes the economics of production at
different scales.
b. As per LRAC, it is possible to have a better cost with a low production scale. A larger
scale may not cost the best if operated at very low capacity utilization levels.
c. Both a & b 
d. The Short Run Average Cost curve reaches its minimum at the point where the
Marginal Curve intersects it,
11. The Professor asked the student, "By the way, have you observed all juice centers in a
neighborhood operate from similar-sized shops? Even the fruit vendor's push carts have
identical sizes. Have you ever wondered why?
a. The Long Run Average Cost curve illustrates a scale at which a firm operates at the
lowest cost in any business. The firms need to work at this point to remain cost–
competitive. 
b. Generally, one design catches people's fancy.
c. The juice centers and the fruit vendors operate at increasing returns to scale.
d. The juice centers and the fruit vendors prefer to operate at decreasing returns to
scale.
12. Dr. Ramesh had set up a hospital in Saharanpur, a relatively remote town in Uttar Pradesh.
He made the following comment about his business. "Until December 2020, we struggled to
profit from the hospital. We did not have a sufficient number of patients. Then the pandemic
happened, and the hospital was left overcrowded. And guess what? We still did not make
any profits. We again faced a loss."
a. The total profit curve stays above the horizontal axis between two break-even
points. At the first point, the revenue catches up with costs; at the second, the costs
rise to meet the revenues.
b. On both occasions, his marginal costs stayed above his marginal revenues. 
c. Dr. Ramesh had not been able to forecast the demand.
d. None of the above.
13. The cross-price elasticity of Products A and B (in India) is calculated to be 0.346. This means
a. A and B are complementary products, and the increase in the price of one would
depress the demand for the other.
b. A and B are products neutral to each other, and the price increases of one would not
affect the other.
c. B is a superior product, and its consumption would increase with income.
d. A and B are substitute products, and the increase in the price of one would increase
the demand for the other. 
14. Which of the following would happen if the demand for petrol increases?
a. The price of diesel would increase in the market because petrol and diesel are
complementary products.
 b. The price of diesel will increase if the supply of crude is constant. The increase in
demand would mean less crude would be available for diesel production. The
reduction in supply would push up the prices. 
c. The price of diesel would increase because petrol and diesel are substitute products.
d. None of the above.
15. Which of the following statement is correct?
a. The law of equi-marginality leads to the equation MUx /Px = MUy / Py, where MU and P
represent the marginal utilities and prices associated with two goods, X and Y.
b. An increase in the price of good X would lower the left-hand side of the equation
and make the consumer demand Product Y. Thus, the demand for product X would
fall.
c. In this way, the law of equi-marginality substantiates the law of demand.
d. All the above statements are correct. 