BBA(HONS) PART-III-Afternoon-University OF Sindh

ASSIGNMEND BY: MUDASAR PATOLI

ROLL NO: 2k18/BBAE/181
SUBJEST: MANAGERIAL ECONOMICS
COURSE NO: C.NO. 505
CLASS: BBA-III (3rd YEAR)
SEMESTER: 5th
ASSIGNMEND TO: SIR NAZEER GOPANG
MANAGER
IAL
ASSIGNMENT
ECONOMI
CS
 1-Discuss the
cost theory and analysis in detail:
 Cost:
Cost is defined as those expenses faced by a business in the process of
supplying goods and services to consumers.
The expenditure incurred to produce an output or provide service.
Thus the cost incurred in connection with raw material, labour, other
heads constitute the overall cost of production.

 Types Of Costs:
1-Accounting Cost. 2-Economic Cost. 3-Variable Cost.

 1.Accounting Cost:
All those expenses that incurred during production with adjusted
depreciation is called accounting cost.
Cash payments which firms make for factor and non-factor input
depreciation other book keeping entries.
 2.Economic Cost:
Economic costs includes the payments such as rent, wages, interest
and profit, which are paid to factors of production – land, labour, capital
and entrepreneur for their services.
Economic Costs = Accounting Costs + Implicit Costs.
 3.Opportunity Cost or Variable Cost:
Factors of production or resources, in an economy are limited and have
alternative uses. The cost of sacrifice or foregone for the next best use
of resource is known as opportunity cost.
 Sunk Cost:
A cost that has already been incurred and thus cannot be recovered.

 Cost Function:
1.Short Run Cst Function.
2.Long Run Cost Funtion.

 Cost Function:

 Short-Run Cost Functions:

In short-run period, some of the firm’s inputs are fixed and some are
variable, and this leads to fixed and variable costs.

>Fixed Cost
>Variable Cost
>Total Cost .
>Average Fixed Cost.
>Average Variable Cost.
>Average Total Cost.
>Marginal Cost

 Fixed Cost: Fixed costs are those costs which do not change with the
change in level of output
  Variable Cost: Variable costs are the costs which change with the
change in level of output when output is zero, the variable cost also zero.
It will increase with the increase in level of output. E.g. electricity
changes, telephone charges. Clean and disinfect frequently touched
objects.
 Total Cost:Total costs is the cost of all the productive resources used by
the firm.
TC = TFC + TVC
 Average Fixed Cost: Average Fixed Cost, can be calculated by dividing
total fixed cost with the level of output. As the level of output increases,
the average fixed cost decreases.
AFC = TFC /Q

 Average Variable Cost : Average Variable Cost is the per unit cost of
the variable factors of production. It can be calculated dividing total
variable cost by output.
AVC = TVC/Q

 Average Total Cost: Average cost is the total cost per unit . It can be
found out as follows.

 Marginal Cost: Marginal cost is an addition made to total cost by the

production of one more unit of output.
MG=  ∆TC/ ∆Q
 Average Total Cost = ATC = TC/Q
Average Fixed Cost = AFC = TFC/Q
Average Variable Cost = AVC = TVC/Q
ATC = AFC + AVC
Marginal Cost = TC/Q = TVC/Q

 Long-Run Cost Functions:

In n long run all factors of production are changeable. In long run a firm
can increase its capacity, equipment, machinery, land, employee, etc. in
order increase output.

Long-Run Total Cost = The minimum total costs of producing various

levels of output when the firm can build any desired scale of plant:
LTC = f(Q)

Long-Run Average Cost = The minimum per-unit cost of producing any

level of output when the firm can build any desire scale of plant:
LAC = LTC/Q
Long-Run Marginal Cost = The change in long-run total costs per unit
change in output:
LMC = LTC/Q

The slope of the total revenue TR curve refers to the product price of $10
per unit. The vertical intercept of the total cost of (TC) curve refers TFC
of $200, and the slope of the TC curve to the AVC of $5. The break- even
with TR=TC $400 at the output (Q) of $40 units per time period at the
point B.
Solve Problem: Based on consulting economist’s report, th total and
marginal cost functions for Advanced Electronics, Inc. are
TC = 200 + 5Q – 0.04Q2 + 0.001Q3
MC = 5 – 0.08Q + 0.003Q2
The president of the company determines that knowing only these
equations is inadequate for decision making. You have been directed to
do the following:
a. Determine the level of fixed cost (if any) and equations for average
total cost.
b. Determine the rate of output that results in minimum average
variable cost
c. If fixed costs increase to $500, what output rate will result in
minimum average variable cost .

(A)
TC=Total Cost
ATC=Average Total Cost
AVC=Average Variable Cost

TC = 200 + 5Q – 0.04Q2 + 0.001Q3

MC = 5 – 0.08Q + 0.003Q2

Fixed Cost=200

ATC = TC
Q
ATC = 200+5Q-0.04Q 2+0.001Q2
Q
ATC=205-0.039
ATC=204.961
 AVERAGE TOTAL COST(ATC) = 204.961 FIXED COST (FC) =200

(B)
Average Variable Cost(AVC)
AVC=5-0.04Q+0.001Q2
AVC=5-0.039=4.961
AVERAGE VARIABLE COST(AVC) = 4.961
(C)If fixed costs increase to $500
C(Q)=C(500)
TC=200+5(500)1-0.04(500)2+0.001(500)3
TC=200+2500-10000+125000
TC=117,700 Ans

2-Define the Followings:

 1-Pricing Of Multiple Products:

As the name suggests, multiple pricing refers to the practice of offering
more than one price for the same product. The supplier charges different
prices based on:
• Ordered Quantity
• Type of customer
• Delivery time
• Payment terms etc.

Although this is sometimes not ethical, many suppliers do follow this

approach to improve profits. The basic idea is to make the best offer that
the consumer doesn’t refuse. By offering a spectrum of prices, companies
can serve a more diverse customer segment and maximize their profits.

For example, small-time fruit and vegetable vendors often offer different
prices for different quantities bought- e.g. 2 guavas for Rs. 10, 5 guavas
for Rs. 20. This is done to incentivize consumers to buy more of the
product. Similarly, in flea markets, the vendors don’t have display prices
for most products and charge customers based on their perception of
their willingness to buy or propensity to spend. Tourists are often charged
more because they are not aware of the actual value or price.
 Also consider the example of Amazon that offers different shipping costs
based on delivery time. It offers same day delivery at a higher price than
standard delivery.

Multiple pricing can also refer to use of several display prices for the
same good. According to laws and regulations, if a business has more
than one price on display for the same item, it must sell the products at
the lower price or withdraw those products from sale.

 2-Price Discrimination:

Price discrimination is defined as a business charging different

consumers different prices for the same product

There are several types of price discrimination

1. 1st degree discrimination:
Sell each separate unit at different price
2. 2nd degree discrimination:
Different groups are charged different price
3. 3rd degree discrimination :
Two or more sub markets with different price

Price discrimination is not the same as product differentiation where the

quality / characteristics of the good/service vary by the type of customer.

 3- Product bundling:
Bundling is when companies package several of their products or
services together as a single combined unit, often for a lower price than
they would charge customers to buy each item separately. This
marketing strategy facilitates the convenient purchase of several
products and/or services from one company.

 4- Peak-load Pricing:
The Peak Load Pricing is the pricing strategy wherein the high price is
charged for the goods and services during times when their demand is
 at peak. In other words, the high price charged during the high demand
period is called as the peak load pricing

 5- Cost Plus Pricing:

Cost plus pricing is a pricing method that attempts to ensure that costs
are covered while providing a minimum acceptable rate of profit for the
entrepreneur. It is calculated by adding a fixed mark-up to average (or
unit)  costs of production.

Cost-plus pricing is common in markets where a few firms dominate (an

oligoplistic market) and share similar production costs. In this case, cost-
plus pricing provides a convenient rule for firms and reduces the risks
associated with price competition.

Game Theory  suggests that if firms are able to tacitly collude by sharing
a ‘pricing methods’ then collusion is harder to detect and difficult for
regulators to penalise.

Solve Problem:
A small firm traps rabbits for their fur and feet. Each rabbit yields one
pelt and two feet (only the hind feet are used to make good-luck
charms). The demand for pelts is given by P P = 2.00 –0.001QP and
the demand for rabbit’s feet is given by
PF = 1.60 – 0.001QF . The marginal cost of trapping and processing
each rabbit is $0.60.

a. What are the profit-maximizing prices and quantities of pelts and

rabbit’s feet?
b. If the demand of rabbit’s feet is PF = 1.00 – 0.001QF, what are the
profit-maximizing prices and rates of output?
 (a)Solution:

 Profit-maximizing Prices and Quantities of pelts and rabbit’s feet:

 Solution for pelts

P p = 2.00-0.001Q P

 Solution for feet

P F = 1.60-0.001Q F

 When these equations multiply by Q we will get TR equation as

TR = PXQ
Qp(Pp=2.00-0.001Qp) Qf(Pf=1.60-0.001Qf)
2
QpPp=2.00Qp-0.001Qp QfPp=1.60Qf-0.001QF 2
TR=QXP

TRp=2.00Qp-0.001Qp2 TRf=1.60Qf-0.001QF 2
 Calculate marginal revenue (MR) by taking derivative of TR (total
revenue).
MRp=2.00-0.002Qp MRf=1.60-0.002Qf
 Combining both marginal revenue equations we can get total MR
equation
MRt= 360-0.004Q
 GET MRt equal To Mc($0.60) and solve for Q 3.60-0.004Q =0.60
Q = -3.60 = 750
- 0.004
Pp = 2.00-0.001(750) Pf = 1.60-0.001Qf
Pp=1.25 Pf = 1.60 -0.001(750)
Pf =0.85
(b)Solution:

PELT FEET
Pp=2.00-0.001Qp Pf=1.00-0.001Qf

 Multiply both equations by Q we will get TR

TRp=2.00Qp-0.001Qp TRf=1.00Qf-0.001Qf

 Taking derivative we will get MR

MRp=2.00-0.002Qp MRf=1.00-0.002Qf

 Combine both marginal revenue equations

MRT=3.00-0.004Q

 Set MRT = MC(0.60) and solve for Q

3.00-0.004Q=0.60
Q= -2.40 = 600
-0.004
Pp=2.00-0.001Qp Pf=1.00-0.001(600)
=2.00-0.001(600) 0.04
Pp=1.4 Pf=0.4

Solved
  3- What do you know about capital
budgeting..
Capital budgeting is the process a business undertakes to evaluate
potential major projects or investments. Construction of a new plant or a
big investment in an outside venture are examples of projects that would
require capital budgeting before they are approved or rejected.

As part of capital budgeting, a company might assess a prospective

project's lifetime cash inflows and outflows to determine whether the
potential returns that would be generated meet a sufficient target
benchmark. The process is also known as investment appraisal.

Sources:-
Capital budgeting decisions are financed using long term sources.
Various types of long term sources are:
 Equity capital (equity shares or ordinary shares)
 Hybrid capital(preference shares)
 Debit capital(debentures/bonds and terms loans)
Types Of Capital Budgeting:

 Throughput Analysis :

Throughput analysis is the most complicated form of capital budgeting

analysis but also the most accurate in helping managers decide which
projects to pursue. Under this method, the entire company is considered as
a single profit-generating system. Throughput is measured as an amount of
material passing through that system.
 DCF Analysis:

Discounted cash flow (DCF) analysis looks at the initial cash outflow
needed to fund a project, the mix of cash inflows in the form of revenue,
and other future outflows in the form of maintenance and other costs.

 Payback Analysis:

Playback Analysis is the simplest form of capital budgeting analysis but it's
also the least accurate. It's still widely used because it's quick and can give
managers a "back of the envelope" understanding of the real value of a
proposed project.

This analysis calculates how long it will take to recoup the costs of an
investment. The payback period is identified by dividing the initial
investment in the project by the average yearly cash inflow that the project
will generate.

Solve Problem :

Staff members of financial analysis department of Global Electronics

have determined the required investment and rate of return on each of
the following projects.

Capital Projects Required Investment (millions) Internal

rate of ret (%)
A 5.2 12.9
B 8.6 15.2
C 3.4 10.0
D 5.1 14.8
E 11.2 19.0
F 6.5 7.9

The firm’s marginal cost of capital is given by the function r = 8 + 0.10C

where r is the rate of return (in percentage) and C is millions of dollars of
capital raised for investment.
a. Graph the firm’s marginal cost of capital function and firm’s capital
demand function.
 b. Which capital projects should be implemented? What should be the
firm’s total capital investment?
c. If a general tightening in the financial markets shifts the firm’s
marginal cost of capital function to r = 8 + 0.35C, determine which
projects should be implemented and the total amount spend on
capital items

SOLUTION (A)

The firm’s marginal cost function of capital of each project can be

calculated from the following table.

Capital Required IRR r=8+0.10c Marginal cost

project investment (%) of capital
a 5.2 12.9 r=8+0.10(5.2) 8.52
b 8.6 15.2 r=8+0.10(8.6) 8.86
c 3.4 10.0 r=8+0.10(3.4) 8.34
d 5.1 14.8 r=8+0.10(5.1) 8.51
e 11.2 19.0 r=8+0.10(11.2) 9.12
f 6.5 7.9 r=8+0.10(6.5) 8.65

 Total investment = 40.0 million

 SOLUTION(B)

Capital project Required Cost of project MCC

investment x
100
A 5.2 x 12.9% 0.6708 million 8.52
B 8.6 x 15.2% 1.3072 million 8.86
C 3.4 x 10% 0.34 million 8.34
D 5.1 x 14.8% 0.7548 milion 8.51
E 11.2 x 19% 2.128 million 9.12
F 6.5 x 7.6% 0.5135 milion 8.65

 As the table shows firm can make investment in prohects A B C

D and E Because in these projects IRR is greater than mcc.

I. What should be firms total capital investment?

 Firms total capital investment is
5.2+8.6+3.4++5.1+11.2= 33.5 millions
 SOLUTION (C)

Capital Required IRR (%) R=8+0.35c MCC (%)

projects investment
A 5.2 12.9 R=8+0.35(5.2) 9.82
B 8.6 15.2 R=8+0.35(8.6) 11.01
C 3.4 10 R=8+0.35(3.4) 9.19
D 5.1 14.8 R=8+0.35(5.1) 9.785
E 11.2 19 R=8+0.35(11.2) 11.92
F 6.5 7.9 R=8+0.35(6.5) 10.275

 As it is clear from the above table that again firm can invest in
projects A B C D and E b/c their irr is greater than mcc and
project F is rejected b/c its irr is less than mcc.

I. What should be the firms total capital Investment?

5.2+8.6+3.4+5.1+11.2= 33.5 millions as the same in the first case.