MG2452, Engineering Economics & Financial Accounting Department: B.E.

(CSE) 2012-2013
UNIT I
PART A
1. Define Economics.
Economics is a science which studies human behaviour as a relationship between
ends and scarce means which have alternative uses.--Prof.Lionel Robbins
Economics is the study of how societies use scarce resources to produce valuable
commodities and distribute them among different people.---Paul A. Samuelson
2. Define Managerial Economics.
Refers to the application of economic theory and the tools of analysis of decision
science to examine how an organization can achieve its aims and objectives most
efficiently. Salvatore
The study of how to direct scarce resources in a way that most efficiently achieves
a managerial goal.Michael R Baye
3. What do you mean by the word economics?
Economics is a science of wealth---Adam Smith
Economics is a study of mankind in the ordinary business of life. It examines that part
of individual and social action which is most closely connected with the use of the
material requisites of well-being.--Alfred Marshall.
4. Mention the disciplines closely related to economics.
Economics is closely related to other disciplines such as Politics, History, Psychology,
Ethics, Anthropology, Mathematics and Statistics.
5. Distinguish between macro economics and micro economics.
Macro economics is concerned with the behaviour of the economy as a whole eg.
National income, general price level.
Micro economics is the study of individual units of the economic system eg. Firm,
industry, etc.
6. Explain positive and normative economics.
Positive economics is concerned with the study of things as they are based on
observation. Example: how prices rise?
Normative economics is concerned with value judgement about what ought to be.
Example: Is the rise in price of a given commodity justified?
7. Mention the disciplines related to managerial economics.
Economics, Operations Research, Mathematics, Statistics, Accountancy, Psychology,
Organizational Behaviour
8. Define the concept of firm.
A firm is a single business unit whereas industry refers to the group of firms carrying on
similar activity.
9. State the various types of firms.
Sole Proprietorship firms & partnership firms
10. State the Objectives of a Firm
Objectives of a Firm
Profit maximization
Sales (Revenue) maximization
Wealth or Value maximization
Long-run survival
Size maximization
Managerial utility maximization

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MG2452, Engineering Economics & Financial Accounting Department: B.E.(CSE) 2012-2013

11. Mention the types of economic systems.
Socialist Economy
Capitalist or Market Economy
Mixed Economy
Laissez-faire or Free Economy
12. Explain features of Socialist economy.
Features of Socialist Economy:
The government:
owns most of the means of production (land & capital)
is the employer of enterprises in most industries
decides how the output of the society is to be divided among different goods and
services
13. Explain features of Capitalist / Market economy.
Features of Capitalist or Market Economy
Private individuals/enterprises own most of the means of production (land &
capital)
Private people own and direct the operations of enterprises in most enterprises
Role of the government is to oversee/regulate the functioning of the market.
All major decisions relating to consumption and production are left to the market
forces hence also called as market economy.
14. What is Mixed economy?
Mixed Economy is economy in which both private individuals and government own most
of the means of production and are the employers.
India is an example for mixed economy where public and private sector enterprises coexist.
15. What is Laissez-faire or Free Economy?
Government does not interfere in the economic affairs and leaves economic
decisions to the interplay of supply and demand in the market place.
As all the decisions are left to the market forces it is also called as free economy.
16. State the scope of managerial economics.
Main focus of managerial economics is to find an optimal solution to a given managerial
problem
Problems may relate to
Production
Reduction or control of costs
Determination of price of a product/service
Make or buy decisions
Inventory decisions
Capital management
Profit planning and Investment decisions
17. State the applications in Managerial Economics.
Main applications in Managerial Economics
Demand decision
Input-output decision
Price-output decision
Profit-related decision
Investment decisions
Economic forecasting and forward planning

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MG2452, Engineering Economics & Financial Accounting Department: B.E.(CSE) 2012-2013

18. What is decision making?
Decision making is the process of selection of the best alternative from the available
alternative courses of action.
19. What is opportunity cost?
Opportunity cost refers to the value that must be foregone in using a resource for one
specific purpose/activity.
20. What is discounting principle?
The process of converting the future cash flows into their present values is called
discounting.
21. Mention the stages in decision making process.
Stages in the Decision Making Process
Identify the problem
Collect necessary and relevant information
The collected information is subjected to a systematic in-depth study
Identifying resources and constraints
Development Criteria for choosing the best course of action
Generation and development of alternatives
22. Mention the types of managerial decisions.
Types of Managerial Decisions
Personal and Organizational decisions
Basic and Routine decisions
Programmed and Non-programmed decisions
23. What is the scope of Managerial Economics? (Dec 2011)
Objectives of a business firm- Demand analysis and forecasting, -cost analysis,- supply
analysis, -profit management, -competition
24. Name the concepts involved in decision making. (Dec 2011)
A major part of decision making involves the analysis of finite set of alternatives
described in terms of some evaluative criteria like benefit and cost. When many criteria is
simultaneously used for solving a problem then it is called as multi-criteria decision
making (MCDM)

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PART - B

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1. Explain the relationship of Managerial Economics with other Disciplines.

Relationship with
Psychology
Statistics
Ethics
Managerial economics
Mathematics

2. Explain the nature and scope of economics.

Nature:
Assumption based
Two branches of study
Positive and normative
Interdisciplinary
Scope: The problem of scarcity and choice- Allocation of resources- prerequisite for problem

MG2452, Engineering Economics & Financial Accounting Department: B.E.(CSE) 2012-2013

solving- How to produce- For whom to produce Economic systems
3. Explain the various disciplines that are linked with managerial Economics.
Relationship with
Psycology
Statistics
Ethics
Managerial economics
Mathematics

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4. Explain the areas of Managerial economics.

Economics is closely related to other disciplines such as Politics, History, Psychology, Ethics,
Anthropology, Mathematics and Statistics.

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5. (i) Explain the difference between normative economics and positive economics
Positive economics is concerned with the study of things as they are based on
observation. Example: how prices rise?
Normative economics is concerned with value judgment about what ought to be.
Example: Is the rise in price of a given commodity justified?
(ii) Explain the scope of Managerial Economics?

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Main focus of managerial economics is to find an optimal solution to a given managerial

problem. Problems may relate to
Production
Reduction or control of costs
Determination of price of a product/service
Make or buy decisions
Inventory decisions
Capital management
Profit planning and Investment decisions

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6. Explain the different economic system with its features?

Types of economic systems are:
Socialist Economy
Capitalist or Market Economy
Mixed Economy
Laissez-faire or Free Economy
Features of Socialist Economy
The government:
owns most of the means of production (land & capital)
is the employer of enterprises in most industries
decides how the output of the society is to be divided among different goods and
services
Features of Capitalist or Market Economy
Private individuals/enterprises own most of the means of production (land &
capital)
Private people own and direct the operations of enterprises in most enterprises
Role of the government is to oversee/regulate the functioning of the market.

MG2452, Engineering Economics & Financial Accounting Department: B.E.(CSE) 2012-2013

All major decisions relating to consumption and production are left to the market
forces hence also called as market economy.
Features of Mixed Economy
Mixed Economy is economy in which both private individuals and government own most
of the means of production and are the employers.
India is an example for mixed economy where public and private sector enterprises coexist.
Features of Laissez-faire or Free Economy

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Government does not interfere in the economic affairs and leaves economic decisions to
the interplay of supply and demand in the market place.
As all the decisions are left to the market forces it is also called as free economy.

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7. Mention the various types of decision making techniques.

Techniques used in Decision making
1. Brain storming
2. Synectics
3. Creative thinking
4. Operation Research techniques (Linear programming, pay-off matrix, simulation,
decision trees, queuing theory, network analysis)

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8. (i) Explain the Objectives of a Firm in detail (Dec 2011)

Objectives of a Firm
Profit maximization
Sales (Revenue) maximization
Wealth or Value maximization
Long-run survival
Size maximization
Managerial utility maximization
(ii) Write short notes on programmed and non-programmed decisions? (Dec 2011)
Programmed decisions are made in routine, repetitive, well-structured situations with
predetermined rules.
Non-programmed decisions are unique decisions that require a custom made solution,
used for a ill-structured or novel problem.

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9. How can you make decisions process more effective? (Dec 2011)
Create a constructive environment
Generate good alternatives
Explore these alternatives
Choose the best alternatives check your decision communicate your decision

10. Enumerate the nature of Managerial Economics? (Dec 2011)

Micro Economics
Theory of the firm
Managerial economics is pragmatic
Managerial economics is normative
Using inputs form Macroeconomics

MG2452, Engineering Economics & Financial Accounting Department: B.E.(CSE) 2012-2013

UNIT II
PART - A
1. What is demand?
A product/service is said to have demand when:
Desire on the part of the buyer to buy
Ability to pay the price for it (purchasing power)
Willingness to spend for it
2. Enumerate the factors determining demand.
Factors determining Demand
Price of the product (P)
Income level of the consumer (I)
Tastes and Preferences of the consumer (T)
Prices of related goods which may be complementary/substitutes (Pr)
Expectations about the prices in Future (Ep)
Expectations about the incomes in future (Ei)
Size of population (Sp)
Distribution of consumers over different regions (Dc)
Advertising efforts (A)
Any other factor capable of affecting the demand (O)
3. State the demand function.
Demand Function describes the relationship between demand and its determinants.
Mathematically, the demand function for product can be:
Qd= f(P,I,T,Pr,Ep,Ei,Sp,Dc,A,O)
Where
Price of the product (P)
Income level of the consumer (I)
Tastes and Preferences of the consumer (T)
Prices of related goods which may be complementary/substitutes (Pr)
Expectations about the prices in Future (Ep)
Expectations about the incomes in future (Ei)
Size of population (Sp)
Distribution of consumers over different regions (Dc)
Advertising efforts (A)
Any other factor capable of affecting the demand (O)
4. What is law of demand?
Other things remaining the same, the amount of quantity demanded rises with every
fall in price and vice versa.

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5. What is Giffins paradox?

Giffins paradox states that demand for inferior goods fall with rise in income.
6. Distinguish between Autonomous Demand and Derived Demand.
Autonomous demand refers to direct demand for products and services.
In case of derived demand, the demand for a product depends upon the demand for a
parent product.
Example: A demand for houses is autonomous whereas demand for steel, cement,

MG2452, Engineering Economics & Financial Accounting Department: B.E.(CSE) 2012-2013

bricks is derived.
7. Differentiate between total market and segment market demand.
Example: The total demand for sugar in the region is the total market demand
whereas the demand for sugar from the sweet industry from this region is the segment
market demand.
8. Define Elasticity of Demand.
Responsiveness of demand to change in any one of its determinants (price, income,
advertising expenditure, prices of related commodities- substitutes & complements).
9. What is price elasticity of demand?
Responsiveness of demand to change in price of the product is called as price
elasticity of demand.
= Proportionate change in quantity demanded for product X
Proportionate change in price of product X
10. What is income elasticity of demand?
Responsiveness of demand to change in income of the consumers is called as income
elasticity of demand.
= Proportionate change in quantity demanded for product X
Proportionate change in income of the consumers
11. What is cross elasticity of demand?
Cross Elasticity of demand refers to the quantity demanded of a commodity in
response to a change in the price of a related goods which may be substitute or
complementary
= Proportionate change in quantity demanded for product X
Proportionate change in price of product Y
12. When the price of tea was Rs.200/kg, the demand for coffee was 10,000kg. When the
price of tea was increased to Rs.250/kg, the demand for coffee increased to 15,000kg.
Find the cross elasticity of demand.
Cross elasticity of demand = {(Q2-Q1)/Q1}/ {(P2-P1)/P1}
P1=Rs200, P2=250, Q1=10000, Q2=15000
Cross elasticity of demand = 2
13. What is utility?
Utility is the satisfaction which a person derives from consumption of a good/service.
14. What is marginal utility?
Marginal utility is the additional utility (satisfaction) derived from consumption of an
additional unit.
It refers to the change in satisfaction resulting from consuming a little more of a
product/service.
15. State the law of diminishing marginal utility.
Law of Diminishing Marginal Utility states that The marginal utility derived on the
consumption of every additional unit of good/service goes on diminishing, other
things remaining the same.
16. State the Law of Equi-marginal Utility
A consumer having a fixed income and facing the given market prices of goods will
achieve the maximum satisfaction or utility when the marginal utility of the last rupee
spent on each good is exactly the same as the marginal utility of the last rupee spent
on any other good.
17. What do you mean by supply?
Supply is the willingness and ability of producers to produce for sale various amounts
of goods and services at each specific price in a set of possible prices during a
specified period of time.

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MG2452, Engineering Economics & Financial Accounting Department: B.E.(CSE) 2012-2013

Supply means the quantity of goods or services offered for sale of various prices at
any moment of time or during or specific time period, say a day, week, month and so
on, the conditions of supply remaining the same.
18. State law of supply with diagram.
Other things remaining the same, the amount of quantity supplied rises with every
rise in price and vice versa.
19. What are the determinants of supply?
Price
Cost of Production
Change in technology
Expectations of sellers towards price rise
Imposition of taxes by the Government
Political Disturbances
20. Mention the Demand Forecasting Levels
Firm level
Industry level
National level
Global level

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21. What are the limitations of Elasticity of Demand? (Dec 2011)

When price of the factors of production cannot be estimated accurately, then
elasticity of demand also cannot be assessed accurately. Erratic changes in
government policies affect elasticity. No factor governing elasticity can be
kept as a constant in real time.
22. Define Law of Supply. (Dec 2011)
If demand is held constant, an increase in supply leads to a decreased price,
while a decrease in supply leads to an increased price.
PART - B

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1. Explain are the factors determining of demand?

Factors determining Demand are:

Price of the product (P)
Income level of the consumer (I)
Tastes and Preferences of the consumer (T)
Prices of related goods which may be complementary/substitutes (Pr)
Expectations about the prices in Future (Ep)
Expectations about the incomes in future (Ei)
Size of population (Sp)
Distribution of consumers over different regions (Dc)
Advertising efforts (A)
Any other factor capable of affecting the demand (O)

2. Explain the factors governing elasticity of demand?

Nature of product
Time frame
Degree of postponement

MG2452, Engineering Economics & Financial Accounting Department: B.E.(CSE) 2012-2013

Number of alternative uses Tastes and preferences of consumer
Availability of close substitutes
Level of price
Availability of subsidies
Expectation of price
Durability of product,
Government policy
3. Explain the different degrees of elasticity of demand with neat diagram?

Perfectly Elastic Demand

Perfectly Inelastic Demand

Relatively Elastic Demand

Relatively Inelastic Demand

Unity Elastic Demand

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4. Explain the factors determining elasticity of Supply and explain types of elasticity of
supply.
Factors determining elasticity of Supply:

Nature of commodity

Behavior of costs of production

Time period

Expectation of prices in future

Availability of production facilities

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Types of elasticity of supply:

a.
Perfectly Elastic
b.
Perfectly Inelastic
c.
Relatively Elastic
d.
Relatively Inelastic
e.
Unity Elastic

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5. The quantity demanded for Product M is 1000 units at a price of Rs.100.

Determine the price elasticity of Demand and also explain the inference for the following:
(i)
When the price declines to Rs. 90 and the quantity demanded increases to 1500
units.
ED p = (Q2-Q1)/Q1
------------=
(1500-1000)/1000
( P2-P1)/ P1
(90-100)/100
=-5
For a 10% change in price, the demand changes by 50%. Since e is grater than one.
Demand is elastic
(ii)
When the price declines to Rs.70 and the quantity demanded increases to 1100
units

ED p = (Q2-Q1)/Q1
------------( P2-P1)/ P1

(1100-1000)/1000
(90-100)/100
=-0.33
For a 10% change in price, the demand changes by 3.3%. Since e is less than one.

MG2452, Engineering Economics & Financial Accounting Department: B.E.(CSE) 2012-2013

Demand is inelastic

(iii)

When the price declines to Rs. 50 and the quantity demanded increases to 1500
units
ED p = (Q2-Q1)/Q1
------------=
(1500-1000)/1000
( P2-P1)/ P1
(50-100)/100
=-1.0
For a 50% fall in price, the demand increases by 50%. Since e is equal to one.
Demand is unity elasticity.

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Significance: Depending on changes in price and demand, managers take decision as to how
much he can supply and also pricing decisions
6. What are the different types of supply?
a. Perfectly Elastic
b. Perfectly Inelastic
c. Relatively Elastic
d. Relatively Inelastic
e. Unity Elastic

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7. Discuss the significance of Elasticity of Demand? (Dec 2011)

Importance in taxation policy
Price discrimination by monopolist
Price discrimination in cases of joint supply
Importance of businessmen
Help to trade unions
Use in International trade
Determination of rate of foreign exchange
Guideline to the producers
Use in factor pricing
What are types of demand?

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8,. Explain the types of Demand?

o Price Demand
o Income Demand
o Cross Demand
o Individual and market demand
o Autonomous and derived demand
o Demand for durable and nondurable goods
o Short term and long term demand

9. State the factors affecting Demand Forecasting.

a. Functional nature of demand
b. Established or New products
c. Nature of goods
d. Degree of competition

MG2452, Engineering Economics & Financial Accounting Department: B.E.(CSE) 2012-2013

e. Other
Factors
(political
development,
changes
in
fashion/technology/inflation/unemployment)
10. Explain how supply and demand determine the equilibrium price (Dec 2011)
Equilibrium is defined to the price-quantity pair where the quantity demanded
is equal to the quantity supplied, represented by the intersection of the demand
and supply curves.
Market Equilibrium:
A situation in a market when the price is such that the quantity that consumers
wish to demand is correctly balanced by the quantity that firms wish to
supply.
Comparative static analysis:
Examines the likely effect on the equilibrium of a change in the external
conditions affecting the market.
Changes in market equilibrium: Practical uses of supply and demand analysis
often center on the different variables that change equilibrium price and
quantity, as shifts in the respective curves. Comparative statics of such a shift
traces the effects from the initial equilibrium to the new equilibrium.
Demand curve shifts:
The movement of the demand curve in response to a change in a non-price
determinant of demand is caused by a change in the x-intercept, the constant
term of the demand equation.
Supply curve shifts:
The movement of the demand curve in response to a change in a non-price
determinant of demand is caused by a change in the x-intercept, the constant
term of the demand equation. The supply curve shifts up and down the y axis
as non-price determinants of demand change.
11.Explain and Enumerate the factors determining Elasticity of supply? (Dec 2011)
Price of the Good
Price of the related goods
Conditions of production
Expectation
Price of inputs
Number of suppliers
Government policies and regulations

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UNIT III

PART - A
1. Define cost.
Actual expenditure incurred for acquiring or producing goods and services.
2. Define Isoquant. (Dec 2011)
Various combinations of two factors of production resulting in same output.
3. What is opportunity cost?
It is the cost of next best alternative which is foregone.
4. What is marginal cost?
It is the addition to the total cost by the last unit of output.
5. What is total cost?

MG2452, Engineering Economics & Financial Accounting Department: B.E.(CSE) 2012-2013

It is the total money expenses incurred for buying the input required for producing a
commodity or aservice. It includes both fixed and variable expenses.
6. What is the relationship between MC and AC?
When AC is
MC is
Falling
Less than the average
cost
Falling
Also constant
Increasing
More than the average
cost

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7. What are the forces that determines the cost of mdoern business?
Rate of output, size of plant, prices of factors of production, efficiency of management
and labour, technology and stability of output.
8. What is sunk cost?
It is thise cost which cannot be altered, increased or decreased, by varying the rate of
output..
9. What are the features of isoquants?
Downward sloping, convex to origin, do not intersect, does not touch axes.
10. What is Isocosts?
It refers to the cost curve that represents the combination of inputs, that will cost a
producer the same amount of money.
11. What is marginal rate of technical substitution ?
MRTS refers to the rate at which one input factor is substituted with the other to attain a
given level of output.
12. State the Cobb-Douglas Production Function.
P=bLaC1-a
Where P=total output, L=the index of employment of labour in manufacturing, C=index
of fixed capital in manufacturing.
13. What is returns toscale?
It refers to the returns enjoyed by a firm as a result of change in all the inputs.
14. What is drecreasing returns to scale?
Where an increase in inputs does not lead to an equivalent increase in the output, the
latter increases at a decreasing rate.
15. What is increasing returns to scale (IRC)?
Where a given increase in inputs leads to more than proportionate increase in the output,
the IRC is said to operate.
16. What is production function?
It is defined as the technical relationship reveals the maximum amount of output capable
of being produced by each and every set of inputs.
17. What is constant returns to scale?
When the scope of division of labour gets restricted, the rate of increase in the total
output remains constant and the these volume of output increase proportionately with the
inputs constant returns to scale is said to operate.
18. What is diseconomies of scale are said to result from an imcrease in the scale of
production leading to a higher cost per unit.
19. What is variable costs?
They are those which vary with the volume production. Variable costs comprise the cost
of raw materials, wages paid to the labour and so on.
20. What is fixed costs ?

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MG2452, Engineering Economics & Financial Accounting Department: B.E.(CSE) 2012-2013

They are those costs which are fixed in the short run. Whether or not production is taken
up, we have to incur certain expenses such as rent of factory and office buildings,
insurance, telephone and electricity bills. Even if production is stopped temporarily, we
have to incur on these fixed costs.
21. Write the difference between explicit and implicit costs. (Dec 2011)
A firms explicit costs comprise all explicit payments to the factors of production the
firm uses. Wages paid to the workers, payments to suppliers of raw materials and fees
paid to bankers and lawyers are examples.
A firms implicit cost consists of opportunity costs of using the firms own resources
without receiving any explicit compensation for those resources. Example, a firm that
uses its own building for production purposes forgoes the income that it might receive
from renting the building out.

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PART B
1. Enumerate the features of short run average cost curve and long run average cost curve.
(Dec 2011)

Costs in short run are classified into fixed cost and variable costs. The short run cost curves are
normally based on a production function with one variable factor of production that display first
increasing and then decreasing marginal productivity.The behavior of this cost includes: total
variable cost increases with production. Average total cost decreases upto a certain levelmarginal cost also decreases upto a certain level of production.
Costs in long run: that period of time over which all factors are variable expressed as series of
short run- U shaped exists diseconomies of scale.

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2. Discuss the economies of scale that can accrue to a firm. (Dec 2011)
Economies of scale are the cost advantages that a business can exploit by expanding their scale
of production. The effect of economies of scale is to reduce the average (unit) costs of
production. When more units of a good or a service can be produced on a larger scale, yet with
(on average) less input costs, economies of scale are said to be achieved. Alternatively, this
means that as a company grows and production units increase, a company will have a better
chance to decrease its costs. The economies of large scale production are classified by Marshall
into - Internal Economies and External Economies.
3. Explain the different types of costs.
Longrun vs Short run, Fixed vs Variable, semifixed vs semi variable, Marginal vs
average, Controlled and non controllable, opportunity vs outlay, Incremental vs Sunk cost,
Exploit vs implicit cost, Out-of-pack vs Book Cost, Rplacement vs Historical, Post cost vs
Future cost,Separable vs joint cost, Accounting cost vs Economic Cost, urgent cost vs
Postponable cost, & Escapable vs unavoidable cost
.
4. What is production function? Explain the same with one and two variable input.
It is defined as the technical relationship reveals the maximum amount of output capable of
being produced by each and every set of inputs. With one variable Labor units are studied with
quantity of output- law of returns.
5. Explain the concept of returns to scale in the production function.
It refers to the returns enjoyed by a firm as a result of change in all the inputs.
Law of returns to scale:
Increasing returns to scale (IRC): Where a given increase in inputs leads to more than
proportionate increase in the output, the IRC is said to operate.

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MG2452, Engineering Economics & Financial Accounting Department: B.E.(CSE) 2012-2013

Constant returns to scale: When the scope of division of labour gets restricted, the rate of
increase in the total output remains constant and the volume of output increases proportionately
with the inputs constant returns to scale is said to operate.
Decreasing returns to scale: Where an increase in inputs does not lead to an equivalent increase
in the output, the latter increases at a decreasing rate.

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Returns to factors: Refer to the output or return generated as a result of a change in one or
more factors, keeping the other factors unchanged.

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6. What are Isocosts? State the Cobb-Douglas Production Function.

It refers to the cost curve that represents the combination of inputs that will cost a
producer the same amount of money.
Cobb-Douglas Production Function
P=bLaC1-a
Where P=total output, L=the index of employment of labour in manufacturing, C=index
of fixed capital in manufacturing.

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7. Classify the internal economies and external economies of scale of production.

Internal economies: Refer to the economies in production costs which accrue to a firm
alone when it expands its output.
Types:
1.Managerial economies
2.Commercial economies
3.Financial economies
4.Technical economies
5.Marketing economies
6.Risk-bearing economies
7.Indivisibilities economies
8.Economies of larger dimensions
9.Economies of Research and Development

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External economies: Refer to the economies that accrue to the industry as a whole. It benefits
all the firms in an industry as the latter expands. This reduces the cost of production and
thereby increases profitability.
Types:
Economies of concentration
Economies of Research & Development
Economies of Welfare

UNIT IV

PART A

1. What are the factors governing the pricing strategies?

The factors governing the pricing strategies of a firm may be divided into two as
external factors and internal factors
(1) The competition in the market.

MG2452, Engineering Economics & Financial Accounting Department: B.E.(CSE) 2012-2013

(II)The elasticity of supply and demand.
(III) The trends of the market.
(IV) Purchasing power of buyers.
(V) Government policy towards prices.
2. What are the price determinants?
The price determinants are
1. Objectives of business
2. Competition
3. Product and promotion strategies
4. Nature of price sensitivity
5. Influence of middle man
6. Government regulations
3. What are the objectives of pricing policies?
Some of the objectives are
a) Profit maximization
b) Long term welfare of the firm
c) Facing competition and
d) Satisfying rate of returns
4. What is market?
Market is a mechanism through which buyers and sellers negotiate and exchange goods
and services.
5. What are the conditions of price determination?
There are two conditions as
a. marginal cost should be equal to marginal revenue
b. Marginal cost curve should pass through the least part of the average cost.
6. What is market structure?
Market structure refers to the situation where in the number of sellers and buyers are
existing, degree of entry and exit freedom available and closeness of substitutes.
7. Define perfect competition:
Perfect competition is a type of market structure where in there are large number of
buyers and sellers dealing with homogenous products and free entry and exit.
8. What is collusion model?
This model works under cartel agreement. Under this agreement the firms jointly
establish a cartel organization to make prices and output decision to establish production
quotas for each firm and to pervise market acitivities of the firms in the industty.
9. State the characteristics of perfect competition.
Large number of sellers and buyers, homogenous products, perfect mobility of factors of
production, free entry and exit of firms, perfect knowledge of market, no government
intervention.
10. What is monopoly?
A market in which there is only one seller of a product having no close substitute.
11. What are the major sources of barriers to entry?
Legal restrictions of barriers to entry of new firms, sole, control over the supply of scarce
and key raw naterials and efficiency and economies of scale.
12. What is price discrimination?
Selling the same or slightly differentiated product top different sections of consumers are
different prices not commensurate with the cost of differentiation.
13. What is third degree of price discrimination condition under monopoly?
When a profit maximising monopolist sets different prices in different markets having
demand curve with different elasticities, he is practising the third degree price

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discrimination.
14. What is monopolistic competition?
It is defined as market setting in which a large number of seller sell differentiated
products.
15. What are the features of monopolistic competition?
Large number of sellers , free entry and free exit, perfect factor mobility, complete
dissemination of market infomration and differentiated product.
16. What is Oligopoly?
It is defined as a market structure in which there are a few sellers selling a homogenous
or differentiated products.
17. What are the sources of Oligopoly?
Huge capital investment, economies of scale, patent rights, control over certain raw
materials and merger and takeover.
18. What are the features of Oligopoly?
Small number of sellers, interdependence of decision-making, barriers to entry,
indeterminate price and output.
19. What is core idea of Kinked demand curve analysis of price stability?
The core idea is that price and output once determined under Oligopolistic conditions,
tend to stabilize rather than flunctuating.
20. What is carterl ?
It is an association of business firms formed by an explicit agreement between them to
make price and output decisions, to establish production quotas for each firm and to
supervise market activities of the firms in the industry.
21. What is penetration pricing? (Dec, 2011)
Charging a low initial price for a new product in order to attract new customer and build
market share.
22. Define cross subsidization. (Dec, 2011)
It is where one group pays a relatively high price and thus enables another group to pay a
relatively low price.

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PART B

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1. Distinguish between in Perfect competition and Monopoly.

Point
of
Perfect competition
comparison
Relationship
AR=MR
between AR and
MR
Profits in the long
Normal profits
run
No. of sellers
Large no. of sellers
Barriers to entry
Free entry and exit
and exit
Control on price
Sellers in only
price taker
Nature of demand
Perfectly elastic
curve

monopoly
AR>MR

Supernormal profits
Single seller
Strong barriers
Price maker
Perfectly inelastic

MG2452, Engineering Economics & Financial Accounting Department: B.E.(CSE) 2012-2013

Relationship
Each firm is a part
Firm and industry
between firm and
of industry
are one and the
industry
same
2. What are the characteristic features of perfect competition?
1. large no. of buyers and sellers
2. homogenous product or services
3. freedom to enter or exit the market
4. perfect information available to buyers and sellers
5. perfect mobility of factors or production
6. each firm is a price taker

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3. Explain the price discrimination in detail.

When a firm sells its product to its customer of different profile at different prices with
no corresponding change in cost, price discriminating is said to exist.
The basis of price discrimination : purchasing power, quantity bought, customers
from different market conditions
The three degrees in price discrimination:
I degree, II degree and III degree of price discrimination.

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4. Explain the various factors influencing price fixation of a product.

Internal factors: organizational factors, price determinants, cost objectives, marketing
mix
External factors: ethical consideration, competition, demand, economic condition,
government policies
5. Explain the various types of pricing methods.
Cost-plus pricing: the average cost at normal capacity of output is ascertained and a
conventional amrgin of profit is added to the cost to arrive at the price.

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Marginal cost pricing: selling price is fixed in such a way that it covers fully the
variable or marginal cost .
Sealed bid pricing: the firm calls for the tender to sell the product and the offering
companies submits the tenders with their price quotation. The company with the
lowest price is selected to sell the product.
Going-rate pricing: the charged by the firm is in tune with the price charged int eh
industry as a whole.

Price discrimination : the practice of charging different prices to customers for the same
good.
Perceived value pricing:fixing the price on the basis of a buyers perception of the value of
the product.
Market skimming : Introducing the product at a higher price in the market.
Market penetration: introducing the product at a lower price and increasing the price as the
market is stabilized.
Two-part pricing: a frim charges a fixed fee for the right to purchase its goods plus a per

MG2452, Engineering Economics & Financial Accounting Department: B.E.(CSE) 2012-2013

unit charge fopr each unit purchased.
Block pricing: the product is divided into blocks and charged different prices according to
the demand of the product.

Price

P1

6. Explain the pricing decision under perfect competition in short run and long run.
Perfect competition:
Large number of seller and buyers , homogenous products, intense competition, price
is fixed according to market condition, eg. Agriculture products.
Short run price determination:
7.
AC
8. Firm
Industry
MC
9.
Cost,
D
S
re venue
10.
D1
E
P
111.
P=AR=MR
12.
E
1
13.
P1=AR1=MR
14.
1
15.S
D
16.
D1
17.
0
Q
Q
18. Q1
Quantity
1
19.

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Supply is constant and firms will get supernormal profit as average revenue is greater than
average cost.
Long run
MC

PRICE

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AC

QUANTIT
Y

In the long run the firm will get normal profit as their average revenue is equal to average
cost.

7.

Explain the features and price determination of Monopolistic competition.

MG2452, Engineering Economics & Financial Accounting Department: B.E.(CSE) 2012-2013

Features:

Many seller and many buyers

Differentiated product
High competition
Regulations for entry and exit
Prices are fixed based on the strength in the market
Eg. Electronic goods , FMCG products, automobile
Price determination in short run:

SHORT RUN

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LONG RUN

MC

M
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D
P

AC

D1

P1

E
D=AR

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D1=AR1

D=AR

QTY

MR

MR

MR1

In the short run, monopolistic firms earn super normal profit that is shown in the diagram . the
area of P1PBC where average revenue is greater than average cost.
In the long run, the firm attracts many firms and their demand reduces as a result the firm get
just the normal profit where average revenue is equal to average cost.
Explain the price level, average cost, average revenue, MC=MR for short run and long run.
8. What are the objectives of pricing policies?
Some of the objectives are
e) Profit maximization
f) Long term welfare of the firm

MG2452, Engineering Economics & Financial Accounting Department: B.E.(CSE) 2012-2013

g) Facing competition and
h) Satisfying rate of returns

9. Why is pricing significance in the context of business? Explain (Dec 2011)

cost plus (penetration) pricing
Demand (skimming) pricing
Rule of thumb (myopic) pricing
By-in (foot-in-the-door) pricing

1.
2.
3.
4.
5.

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10. Discuss any three pricing methods that are followed in real life business situation
(Dec 2011)
Market oriented pricing
Penetration pricing
Premium pricing
Limit pricing
Creaming or skimming pricing

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UNIT V

PART A

1. Define accounting.
The art of recording, classifying and summarizing in terms of money translators and
events of a financial character and interpreting the results there of.
2. Mention any four ratios for analyzing solvency position.
a. Current ratio: current asset/ current liability
b. Liqudity ratio: liquid asset/ current liability
c. Debt equity ratio: debt/ equity
3. State the turnover ratios.
a. The turnover ratios are: inventory turnover ratio: cost of sales/ average stock.
b. Debtors turnover ratio: cost of sales/ bills receviebles(debtors)
c. Creditors turnover ratio: net purchases/ bills payable (creditors)

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4. Define a balance sheet.

Balance sheet is a statement of financial position of an enterprise as at a given date, which
exhibits it assets, liabilities, capital, reserves and other account balance at their
respective book values.
5. State the golden rules of accounting.
account
Debit
credit
Personal account
The receiver
The giver
Real account
What comes in
What goes out
Nominal account
All expenses & losses
All incomes & gains
6. Define gross profit ratio.
Gross profift ratio= gross profit / sales x 100
7. What is debt-equity ratio?

MG2452, Engineering Economics & Financial Accounting Department: B.E.(CSE) 2012-2013

Total debt (loan and borrowed fund)/ equity (owners fund or shareholders fund)
8. What are the components of current liabilities?
Bills payable, creditors, bank overdraft, outstanding expenses, income received in
advance, provision for income tax.
9. What is business entity concept?
The business unit is treated as a separate and distinct from the persons who owe it.
10. Mention the accounting principles.
Business entity concept,quality concept, cost concept, going concern concept, time period
concept, money measurement concept.
11. State the golden rules of accounting.
account
Debit
credit
Personal account
The receiver
The giver
Real account
What comes in
What goes out
Nominal account
All expenses & losses
All incomes & gains
12. Define capital budgeting.
Quantitative measurement of the money and time aspects of the firms plans.
13. List the objectives of capital budgeting.
a. Maximize profits
b. Increase revenue and
c. Reduce cost
14. What is the time value of money?
It is the purchasing power of money. The worth of Rs. 100, in the future will not be
the same as present time. Therefore time value of money, expresses the worthiness of
the money for a specified time period.
15. Define the present value concept.
The present worth of a future payment/instalment or series of payments adjusted
for the time value of money.

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16. How wil l you calculate the Avg. rate of return from an investment proposal?
For determining the Average rate of return the investment in new facilities
originally and as reduced from year to year on the account of depreciation is averaged
out and this average is them divided into the expected average annual amount of
profit after depreciation + taxes.
Average Rate of Return =Average Annual Net Profit
Original lnvst/2
17. What is internal rate of return ?
This is other wise known as time adjusted return or discounted rate of return.
It is defined as the rate of return which discounts all the future cash inflows to exactly equal
the out-lay. In other words. The internal rate of return is the rate of discount that sets the
next present value equal to zero
18. Explain profitability Index.
Profitability Index ratio is the relationship of the present value of the net cash benefits to the
present value of the net cash out-lay. The higher PI, the greater the return.
This method has the meet of placing the present value of each invest project on a relative
basis so that projects of different sizes of capital out-lays can be compared.
19. What are the advantages of analysing capital budgeting?
Useful in buying, replacing the fixed assets
Anticipating the returns in advance
20 . What is bank overdraft? ( December 2011)
It is the limit on borrowing on a bank current account.With an overdraft the amount

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MG2452, Engineering Economics & Financial Accounting Department: B.E.(CSE) 2012-2013

of borrowing may vary on a daily basis
21 . Write down the advantages and disadvantages of IRR method ? ( December 2011)
Advantages
Disadvantages
Recognises time value of money
Complicated to calculate by trial
and error method
Helps the management in
Assumes that the funds received
selecting the most profitable
at the end of each year can be
project
invested at the same rate of return
Does not provide weight age of
the volume of funds committed in
the project

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PART B

1. Explain scope and principles of accounting?

Accounting is The art of recording, classifying and summarizing in terms of money

transactions
and events of a financial character and interpreting the results there of.
The scope and features of Accounting.
o
o
o
o
o
o

Book-keeping function
Classification of information
Preparation of financial statements
Segregating financial transactions
Interpretation of financial data
Reporting accurate and reliable information

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Principles
Business entity concept
Money measurement concept
Going concern concept
Cost concept
Periodicity concept
Dual aspect concept
Realization concept

2. How do you prepare final accounting?

a. Trading account
b. Profit and loss account
c. Balance sheet
3.What is balance sheet? State the uses and importance and draw the format of a balance sheet?

MG2452, Engineering Economics & Financial Accounting Department: B.E.(CSE) 2012-2013

It is a statement of assets and liabilities of business as on a given date.
Uses and importance: Understand the debt equity position
To know the working capital position
Cash position of the company
Debtors position
Creditors position
Shareholders fund of the company
Format:
Liabilities
Amt
Asset
Share capital
Xxx
Building
Debenture
Xxx
Furniture
Long term loan
Xxx
Land
Creditors
xxx
Machine
BOD
Xxx
Long term investment
Bills payable
xxxx
Debtors
Short term loan
xxxx
Short erm investment
Outstanding expenses
Cash in hand
Cash at bank
Closing stock
Prepaid expenses
Total
xxxx
Total

Amt
Xxxx
Xxxx
Xxxx
Xxxx
Xxxx
Xxxx
Xxxx
Xxxx
Xxxx
Xxxx
Xxxx
Xxxx

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4. What are the different financial ratios?

Profitability ratios
Gross profit ratios
Net profit ratio
Operating profit ratio
Operating ratio
Specific expense ratio
Return on investment
Return of equity
Earnings per share
Interest coverage ratio
Activity ratios
Debtor turnover ratio
Debtor velocity ratio
Creditor turnover ratio
Creditor velocity ratio
Stock turnover ratio
Stock velocity ratio
Working capital turnover ratio
Fixed asset turnover ratio
Balance sheet ratios
Current ratio
Liquidity ratio
Debt equity ratio

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MG2452, Engineering Economics & Financial Accounting Department: B.E.(CSE) 2012-2013

Proprietory ratio
Absolute liquidity
5 Explain the limitation of financial statements ? ( December 2011)
Limited use of single ratio
Lack adequate standards
Inherent limitations of accounting
Change of accounting procedures
Window dressing
Personal bias
Price level changes are not considered
Ignorance of qualitative factors
6.Illustrate profit and loss account with assumed data ( December 2011)
Particulars
To insurance
To electricity
To advertisement
expenses
To interest
To salary
To bad debts
To power
To Net Profit`

Amount
14000
16000
24000

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Particulars
By gross profit
By interest received
By discount

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40000
100000
30000
10000
256000
520000

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5,00,000
14000
6000

520000

7. Explain the various accounting concepts and conventions?

Business entity concept
Going concern concept
Money measurement
Matching concept
Accounting period concept
Dual aspect concept
Realization concept
Cost concept
CONVENTIONS
Convention of conservatism
Convention of consistency
Full disclosure
Objectivity
Materiality
8 . From the following particulars of two proposals, each costing Rs.3,00,000 each, rank the
proposals under payback method, NPV and PI method. The life time of each of the asset is four
years and the company is particular about a yield of 12 percent interest rate per annum.
Present value of Re. 1 for 1yr -0.893., 2yr- 0.797., 3yr- 0.712 and 0.636

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Proposal I

Proposal

MG2452, Engineering Economics & Financial Accounting Department: B.E.(CSE) 2012-2013

II
I
1,40,000
1,10,000
II
1,20,000
1,00,000
III
30,000
1,60,000
IV
50,000
30,000
Solution:
On the basis of pay back period:
yearsProposal I

I
II
III
IV

Cumulative
cash
inflow PI
1,40,000 140000
1,20,000 260000
30,000
290000
50,000
340000

Proposal II

Pay back period for Proposal I : 3 years and 2 months

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I
1,40,000 1,10,000
II
1,20,000 1,00,000
III
30,000
1,60,000
IV
50,000
30,000
Total present value of cash inflow
Present value of cash outflow
Net present value

.893
.797
.712
.636

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1,10,000
1,00,000
1,60,000
30,000

Pay back period for Proposal II: 2 years and 7months

Net present value:
yearsProposal I
Proposal II PV of Re.1

Cumulative
cash inflow
PII
110000
210000
370000
400000

PV ofCIF
for P I
125020
95640
21360
31800
273820
300000
-26180

PV ofCIF
for PII
98230
79700
113920
19080
310930
300000
10930

Inference: NPV for Proposal I: 26180 and Proposal II:-10930

Proposal II is preferable than Proposal I as NPV of proposal II (10930) is greater than NPV of
proposal I (26180).

Profitability Index: Proposal I =273820/300000=.913

Proposal II=310930/300000=1.036

Inference: Proposal II (1.036) is preferred for proposal I (.913)

9. Explain in detail various techniques of capital budgeting?

The system of capital budgeting is employed to evaluate expenditure decisions which involve
current outlays but are likely to produce benefits over a period of time longer than one year. It
includes addition, disposition, modification & replacement of dixed assets.
Classified into 2 types:
Traditional techniques: pay back period, average rate of return
Discounting method: net present value, profitability index and internal rate of return.
1. Pay back period: measures the number of years required for the cash inflow to payback to

MG2452, Engineering Economics & Financial Accounting Department: B.E.(CSE) 2012-2013

original outlay required in an investment proposal.
PBP= cash outflow/ annual cash inflow
Criteria: lesser payback period better the project
2. Average rate of return (ARR): it is based on accounting information rather than cash flow.
Estimated in 2 methods:
On oringinal investment:
(average annual profits after depreciation and tax/ original ivest ) x 100
On average investment:
(average annual profits after depreciation and tax/ average investment ) x 100
average investment = ((cost of project scrap)/2) + working capital + scrap
Criteria: higher the ARR, better the project.
3.Net present value (NPV): summation of the present value of cash proceeds(CFAT) minus
present values of cash outflows. (NPV= PV of cash inflow PV of cash outflow

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Criteria: NPV > zero, accept the project

NPV < zero, reject the project
4. Profitability Index: (PI) measures the present value of returns per rupee invested.
= PV of cash inflows/ PV cash outflows
Criteria: PI > 1 , accept the project
PI < 1, reject the project.
5. Internal rate of returns: rate of return that a project earns. It is defined as the discout rate which
equates the aggregate PV of the net cash inflow with the aggregate present value of cash out
flows of a project. Or it is that rate which gives the project NPV of zero. Estimated on trial and
error method.
F=I/C, where I is originial investment and C is the cash inflow, to identify the interest rate range
and find out the exact IRR.

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Criteria:
IRR > cutoff rate, accept the project
IRR < cutoff rate , reject the project.
Hgiher the IRR, better the project.

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10. Make a comparison between NPV and IRR

Though both are discounted cash flows methods, there are certain fundamental
differences:
a) The IRR and NPV methods can give different results in the ranking of proposals.
IRR method assumes that future cash receipts are invested at the rate of return
forecast for the project. The NPV method assumes that proceeds are invested
at the required return.
If the forecast return on the project exceeds the required rate as an unknown factor.
b) The basic presumption of the NPV method is that intermediate cash inflows
are reinvested at the cut off rate, whereas, in the case of the IRR method,
intermediate cash flows are presumed to be reinvested at the IRR.