IGNOU MBS MS-09 Solved Assignments 2010

Course Code Course Title Assignment Code Coverage : : : : MS-9 Managerial Economics 9/TMA/SEM-I/2010 All Blocks

Note: Please attempt all the questions and send it to the Coordinator of the study center you are attached with

1. Profit Maximisation is the main objective of a firm Discuss this statement with the help of an example. Solution: The profit maximization principle stresses on the fact that the motive of business firms to maximize profit is solely justified as being a method of maximizing the income of their shareholders. Firms may maximize profit by maximizing sales, stock price, market share or cash flow. In order to achieve maximum profit the firm needs to find out the point where the difference between total revenue and total cost is the highest. The rules that apply for profit maximization are: i. increase output as long as marginal profit increases ii. profit will increase as long as marginal revenue (MR) > marginal cost (MC) iii. profit will decline if MR < MC iv. summing up (ii) and (iii), profit is maximized when MR = MC A process that companies undergo to determine the best output and price levels in order to maximize its return . The company will usually adjust influential factors such as production costs , sales prices, and output levels as a way of reaching its profit goal . There are two main profit maximization methods used, and they are marginal Cost-Marginal revenue method and Total Cost-Total Revenue Method. Profit maximization is a good thing for a company, but can be a bad thing for consumers if the company starts to use cheaper products or decides to raise prices. Economic theory is based on the reasonable notion that people attempt to do as well as they can for themselves, given the constraints facing them. For example, consumers purchase things that they believe will make them feel more satisfied, but their purchases are limited (at least in the long run) by the amount of income they earn. A consumer can borrow to finance current purchases but must (if honest) repay the loans at a later date. Business owners also attempt to manage their businesses so as to improve their well being. Since the real world is a complicated place, a business owner may improve his well being in a number of ways. For example, if the business doesn't

lack customers, the owner could respond by reducing operating hours and enjoying more leisure. Or, the business owner may seek satisfaction by earning as much profit as possible. This is the alternative we will focus on in class - for a very good reason. If a business faces tough competition, the only way the business can survive is to pay attention to revenues and costs. In many industries, profit maximization is not simply a potential goal; it's the only feasible goal, given the desire of other businesspeople to drive their competitors out of business. In economic terms, profit is the difference between a firm's total revenue and its total opportunity cost. Total revenue is the amount of income earned by selling products. In our simplified examples, total revenue equals P x Q, the (single) price of the product multiplied times the number of units sold. Total opportunity cost includes both the costs of all inputs into the production process plus the value of the highest-valued alternatives to which owned resources could be put. For example, a firm that has $100,000 in cash could invest in new, more efficient, machines to reduce its unit production costs. But the firm could just as well use the $100,000 to purchase bonds paying a 7% rate of interest. If the firm uses the money to buy new machinery, it must recognize that it is giving up $7000 per year in forgone interest earnings. The $7000 represents the opportunity cost of using the funds to buy the machinery. We will assume that the overriding goal of the managers of firms is to maximize profit: P = TR - TC. The managers do this by increasing total revenue (TR) or reducing total opportunity cost (TC) so that the difference rises to a maximum. An Example Suppose you are running a business that produces and sells office furniture. It's a small operation, and in a typical day you produce three custom desks. You are able sell these desks for $500 apiece. You employ five workers, each of whom earns $15 per hour ($120 per day), and you work alongside them and pay yourself at the same rate. Material inputs cost $150 per desk. Of course, you have additional "overhead" expenses, including rent, a secretary/bookkeeper, electricity, etc. This overhead, which we will assume does not vary with the number of desks produced (i.e., it's a fixed cost) comes to $130 per day. Thus, your company earns a profit of P = ($500 x 3) - ($720 + 450 + 130) = $1500 - $1300 = $200 per day. (Wages for six workers come to $720. Materials for three desks cost $450. Overhead is $130.) Working five days a week for 50 weeks a year, that comes to an annual profit of $50,000. Pretty nice - but could you do better? Suppose you decide to increase production to four desks per day. This requires you to hire two more workers (at another $240) and purchase another $150 worth of materials. Overhead expense doesn't change. Your total cost rises to $1690. You find that you are able to sell the fourth desk for $500. Was this a good decision? [Engage brain here.] You're right. [I'm giving you the benefit of the doubt here.] Total revenue rises to $2000 per day, while total costs rise to $1690. Profit increases to $310 per day. Good show, old man/woman/[insert desired politically correct term here]!

This nice result may lead you to increase production to five desks a day. If you are able to sell all five desks for $500 each, and if your variable costs of producing the desks - what you pay in labor and materials - doesn't increase, producing a fifth desk makes sense. TR rises to $2500, TC rises to $2080, and profit increases to $420. So you sell five desks. Suppose, however, that you find that the labor market is so tight that you cannot hire another two workers at $15 per hour. In fact, to hire your ninth and tenth workers, you must pay $20 per hour. That increases the labor cost of the fifth desk by $80 ($40 per worker times two workers). TC rises to $2160, which still allows profit to increase to $340. But we have a problem brewing. Can you really get away with paying your veteran workers $15 an hour, while at the same time hiring new workers at $20 per hour? Not likely. So when you hire the ninth and tenth workers, you are forced to raise the wages of your first eight workers (Pay yourself more; hey, you deserve it.). Let's recalculate profit for Q = 5. TR = $500 x 5 = $2500. TC = ($160 x 10) + ($150 x 5) + $130 = $2480. That leaves a profit of $20. Doesn't look like such a good idea now, does it Einstein? Thus, if you realize that your costs will rise sharply if you produce a fifth desk each day, you will decline to produce the desk. Application Our little example illustrates the situation every business owner or manager faces. Businesspeople know what their current position is (revenue and costs) and they can estimate TR and TC for a higher (or lower) level of production. By actually changing output levels, they learn by experience what their demand and cost curves look like. In the process, they discover what happens to profit as they change output levels. Through this discovery process, businesspeople seek to find the output level that maximizes profit. As omniscient onlookers, we can describe this process a bit more analytically. A firm should increase its output so long as the marginal revenue earned from additional units of production is greater than the marginal cost of those units. Marginal revenue is the additional revenue earned by selling one more unit of a product. (In our example, MR = $500.) Marginal cost is the additional cost incurred in producing one more unit of output. So long as MR > MC, profit grows. However, when MR < MC, profit shrinks. So firms expand output only to the point at which MR = MC. This point maximizes profit. The profit-maximization rule applies both to firms that are able to sell their product at a constant price (as in our example) and to firms that find they must reduce the price of their product to increase sales. In the real world, firms have to engage in trial-and-error discovery processes, searching for the profitmaximization point. But the process can be succinctly described by the marginal revenue-marginal cost rule. *** Suppose that firm j is perfectly competitive.

Case 1) If the market price Pmkt is greater than the minimum of firm j's average total cost (ATC) curve, then firm j maximizes its short run (SR) profits at the output level, denoted Qj*, that satisfies the condition: marginal revenue equals marginal cost (MR = MC). In this case, firm j's SR profits at Qj* are positive and equal to [Pmkt - ATC(Qj*)] x Qj* > 0, where ATC(Qj*) denotes average total cost at Qj*. Note that if Pmkt equals the minimum of the ATC curve (Pmkt = ATC(Qj*)), then firm j's SR profits at Qj* are zero and firm j is said to be at its SR break-even point. Case 2) If the market price Pmkt is between the minimum of the average variable cost (AVC) curve and the minimum of the ATC curve (i.e., min AVC < Pmkt < min ATC), then a firm j maximizes its SR profits (i.e., minimizes its loss) at the output level Qj* that satisfies the condidtion MR = MC. In this case, firm j's SR profits at Qj* are negative but its loss at Qj* is less than its loss if firm j were to shut down and produce zero output, the latter of which would be equal to its total fixed costs, TFC. That is, -TFC < j's SR profits at Qj* = [Pmkt - ATC(Qj*)] x Qj* < 0. Case 3) If the market price Pmkt equals the minimum of the AVC curve, then firm j maximizes its SR profits (i.e., minimizes its loss) either at the output level Qj* that satisfies the condition MR = MC or at 0 (zero) output. In this case, firm j's SR profits at either Qj* or 0 are negative and equal to -TFC and firm j is said to be at its SR shutdowm point. That is, j's SR profits at either Qj* or 0 output = -TFC. Case 4) If the market price Pmkt is less than the minimum of the AVC curve, then firm j maximizes its SR profits (i.e., minimizes its SR losses), at 0 (zero) output. If Qj' is the quantity that satisfies MR = MC, then j's SR loss at Qj'is greater than its SR loss at 0 output, which is equal to -TFC. Thus, the loss (negative profits) are minimized at 0 instead of at the quantity where MR = MC.That is, j's SR profits at Qj' < j's SR profits at 0 output = -TFC < 0 =======================================================

2. Briefly explain the marketing approach to Demand measurement.

Solution: Methods Based on Judgment Unaided judgment METHOD. It is common practice to ask experts what will happen. This is a good procedure to use when experts are unbiased large changes are unlikely relationships are well understood by experts (e.g., demand goes up when prices go down)

 experts possess privileged information experts receive accurate and well-summarized feedback about their forecasts.

Prediction markets METHOD. Prediction markets, also known as betting markets, information markets, and futures markets have a long history. Some commercial organisations provide internet markets and software that to allow participants to predict.Consultants can also set up betting markets within firms to bet on such things as the sales growth of a new product. PREDICTIONS can produce accurate sales forecasts when used within companies. However, there are no empirical studies that compare forecasts from prediction markets and with those from traditional groups or from other methods. Delphi METHOD. The Delphi technique helps to capture the knowledge of diverse experts while avoiding the disadvantages of traditional group meetings. The latter include bullying and time-wasting. To forecast with Delphi the administrator should recruit between five and twenty suitable experts and poll them for their forecasts and reasons. The administrator then provides the experts with anonymous summary statistics on the forecasts, and experts reasons for their forecasts. The process is repeated until there is little change in forecasts between rounds two or three rounds are usually sufficient. The Delphi forecast is the median or mode of the experts final forecasts. The forecasts from Delphi groups are substantially more accurate than forecasts from unaided judgement and traditional groups, and are somewhat more accurate than combined forecasts from unaided judgement. Structured analogies METHOD. The outcomes of similar situations from the past (analogies) may help a marketer to forecast the outcome of a new (target) situation. For example, the introduction of new products in the markets can provide analogies for the outcomes of the subsequent release of similar products in other countries. People often use analogies to make forecasts, but they do not do so in a structured manner. For example, they might search for an analogy that suits their prior beliefs or they might stop searching when they identify one analogy. The structuredanalogies method uses a formal process to overcome biased and inefficient use of information from analogous situations. To use the structured analogies method, an administrator prepares a description of the target situation and selects experts who have knowledge of analogous situations; preferably direct experience. The experts identify and describe analogous situations, rate their similarity to the target situation, and match the

outcomes of their analogies with potential outcomes in the target situation. The administrator then derives forecasts from the information the experts provided on their most similar analogies. Structured analogies are more accurate than unaided judgment in forecasting decisions . Judgmental Decomposition METHOD. The basic idea behind judgemental decomposition is to divide the forecasting problem into parts that are easier to forecast than the whole. One then forecasts the parts individually, using methods appropriate to each part. Finally, the parts are combined to obtain a forecast. One approach is to break the problem down into multiplicative components. For example, to forecast sales for a brand, one can forecast industry sales volume, market share, and selling price per unit. Then reassemble the problem by multiplying the components together. Empirical results indicate that, in general, forecasts from decomposition are more accurate than those from a global approach . In particular, decomposition is more accurate where there is much uncertainty about the aggregate forecast and where large numbers (over one million) are involved. Expert systems METHOD. As the name implies, expert systems are structured representations of the rules experts use to make predictions or diagnoses. For example, if local household incomes are in the bottom quartile, then do not supply premium brands. The forecast is implicit in the foregoing conditional action statement: i.e., premium brands are unlikely to make an acceptable return in the locale. Rules are often created from protocols, whereby forecasters talk about what they are doing while making forecasts. Where empirical estimates of relationships from structured analysis such as econometric studies are available, expert systems should use that information. Expert opinion, conjoint analysis, and bootstrapping can also aid in the development of expert systems. Expert systems forecasting involves identifying forecasting rules used by experts and rules learned from empirical research. One should aim for simplicity and completeness in the resulting system, and the system should explain forecasts to users. Developing an expert system is expensive and so the method will only be of interest in situations where many forecasts of a similar kind are required. Expert systems are feasible where problems are sufficiently well-structured for rules to be identified. Expert systems forecasts are more accurate than those from unaided judgement. Intentions and expectations surveys METHOD.

With intentions surveys, people are asked how they intend to behave in specified situations. In a similar manner, an expectations survey asks people how they expect to behave. Expectations differ from intentions because people realize that unintended things happen. For example, if you were asked whether you intended to visit the dentist in the next six months you might say no. However, you realize that a problem might arise that would necessitate such a visit, so your expectations would be that the event had a probability greater than zero. Expectations and intentions can be obtained using probability scales . The scale should have descriptions such as 0 = No chance, or almost no chance (1 in 100) to 10 = Certain, or practically certain (99 in 100). To forecast demand using a survey of potential consumers, the administrator should prepare an accurate and comprehensive description of the product and conditions of sale. He should select a representative sample of the population of interest and develop questions to elicit expectations from respondents. Bias in responses should be assessed if possible and the data adjusted accordingly. The behaviour of the population is forecast by aggregating the survey responses. Conjoint analysis METHOD. By surveying consumers about their preferences for alternative product designs in a structured way, it is possible to infer how different features will influence demand. Potential customers might be presented with a series of perhaps 20 pairs of offerings. For example, various features of a personal digital assistant such as price, weight, battery life, screen clarity and memory could be varied substantially such that the features do not correlate with one another. The potential customer is thus forced to make trade-offs among various features by choosing one of each pair of offerings in a way that is representative of how they would choose in the marketplace. The resulting data can be analysed by regressing respondents choices against the product features. The method is based on sound principles, such as using experimental design and soliciting independent intentions from a sample of potential customers. Unfortunately however, there do not appear to be studies that compare conjointanalysis forecasts with forecasts from other reasonable methods.

Methods requiring quantitative data Extrapolation METHOD Extrapolation methods use historical data on that which one wishes to forecast. Exponential smoothing is the most popular and cost effective of the statistical extrapolation methods. It implements the principle that recent data should be weighted more heavily and smoothes out cyclical fluctuations to forecast the trend. To use exponential smoothing to extrapolate, the administrator should first

clean and deseasonalise the data, and select reasonable smoothing factors. The administrator then calculates an average and trend from the data and uses these to derive a forecast Statistical extrapolations are cost effective when forecasts are needed for each of hundreds of inventory items. They are also useful where forecasters are biased or ignorant of the situation . Allow for seasonality when using quarterly, monthly, or daily data. Most firms do this . Seasonality adjustments led to substantial gains in accuracy in the large-scale study of time series . Quantitative analogies METHOD. Experts can identify situations that are analogous to a given situation. These can be used to extrapolate the outcome of a target situation. For example, to assess the loss in sales when the patent protection for a drug is removed, one might examine the historical pattern of sales for analogous drugs. To forecast using quantitative analogies, ask experts to identify situations that are analogous to the target situation and for which data are available. If the analogous data provides information about the future of the target situation, such as per capita ticket sales for a play that is touring from city to city, forecast by calculating averages. If not, construct one model using target situation data and another using analogous data. Combine the parameters of the models, and forecast with the combined model. Rule-based forecasting METHODS Rule-based forecasting (RBF) is a type of expert system that allows one to integrate managers knowledge about the domain with time-series data in a structured and inexpensive way. For example, in many cases a useful guideline is that trends should be extrapolated only when they agree with managers prior expectations. When the causal forces are contrary to the trend in the historical series, forecast errors tend to be large . Although such problems occur only in a small percentage of cases, their effects are serious. To apply RBF, one must first identify features of the series using statistical analysis, inspection, and domain knowledge (including causal forces). The rules are then used to adjust data, and to estimate short- and long-range models. RBF forecasts are a blend of the short- and long-range model forecasts. RBF is most useful when substantive domain knowledge is available, patterns are discernable in the series, trends are strong, and forecasts are needed for long horizons. Under such conditions, errors for rule-based forecasts are substantially less than those for combined forecasts . In cases where the conditions were not met, forecast accuracy is not harmed. Causal models METHODS.

Causal models are based on prior knowledge and theory. Time-series regression and cross-sectional regression are commonly used for estimating model parameters or coefficients. These models allow one to examine the effects of marketing activity, such as a change in price, as well as key aspects of the market, thus providing information for contingency planning. To develop causal models, one needs to select causal variables by using theory and prior knowledge. The key is to identify important variables, the direction of their effects, and any constraints. One should aim for a relatively simple model and use all available data to estimate it . Surprisingly, sophisticated statistical procedures have not led to more accurate forecasts. In fact, crude estimates are often sufficient to provide accurate forecasts when using cross-sectional data . ======================================================= 3. From the demand function P = 200 0.25Q or Q = 800 4P. Calculate point price elasticities at (i)P = 20 and Q = 240 and (ii) P = 125.

Solution: From the Given equation, P= 200 - 0.25Q? OR? Q= 800 - 4P Ad1>? Ep = dQ/dP X? P/Q ??????

(- 4) X? 20/240??????????? =?

( So. if Ep < 1; It is inelastic ) ??????????? =? - 1/3 =? - 0.33 2 >? We cannot find out the POINT PRICE ELASTICITY because here Price is Given but Quantity is not Given.(Means Q=0) ?????? We cannot find any solution when? Calculate P/Q = 125/0 = Infinity, means didn't get any result..... ======================================================= 4. An analytical tool frequently employed by managerial economists is the break even chart, an important application of cost function. Explain this statement.

Solution:Break-even analysis is a technique widely used by production management and management accountants. It is based on categorising production costs between those which are "variable" (costs that change when the production output changes) and those that are "fixed" (costs not directly related to the volume of production). Total variable and fixed costs are compared with sales revenue in order to determine the level of sales volume, sales value or production at which the business makes neither a profit nor a loss (the "break-even point"). The Break-Even Chart In its simplest form, the break-even chart is a graphical representation of costs at various levels of activity shown on the same chart as the variation of income (or sales, revenue) with the same variation in activity. The point at which neither profit nor loss is made is known as the "break-even point" and is represented on the chart below by the intersection of the two lines ======================================================= 5. Classification of markets is based on their characteristics. Substantiate this statement with reference to Monopoly and Oligopoly market structures.

Solution: Market Characteristics An industry or market can be analyzed for its attractiveness to a particular company or organization on a number of different characteristics. The list below presents some of the more significant market characteristics that should be considered. -Current market size -Projected market growth rate -Number of competitors, level of fragmentation -Intensity of competition -Technological skills required -Production/operations skills required -Capital requirements -Other barriers to entry -Seasonal and cyclical factors -Industry profitability and returns -Social, political, regulatory and environmental factors -Strategic fits with other businesses already owned -General Introduce the target market and explain the need and demand, major characteristics, market size, and the business opportunity.

-Segmentation Divide the overall market into specific segments, to evaluate the market. Segment the market according to the following keys: By geographical market: split the overall market into geographical marketplaces, such as continents, states, cities. By customer type: split the overall market according to customer types such as industries, social & economic parameters, professions, age. By application type: split the overall market according to application. -Market Size & Trends Evaluate the market size and trends per market segment, and present it in a table similar to the one below: -Competition Describe your main competitors, addressing the following questions: Who is the competition? How strong is the competition in the market? What is our competition's market share? What are the distribution channels? Customer profile Provide a potential customer profile, including: Short description of the customer Short description of purchasing behavior Business Environment Define the business environment and how it affects market behavior. Characteristics of Perfectly Competitive Market Structures: -There are many market participants ie buyers and sellers -The good or service (ie the product) being bought and sold is homogenous ie it is identical -The buyers and sellers in these markets are price takers ie they are too small to influence the market price as individual buyers and sellers -There is freedom of entry and exit by buyers and sellers to and from the market -The firms in these markets do not incur advertising costs since to do so would price firms that advertise out of the market ie all firms can sell their products at market prices -There is perfect information on the part of buyers and sellers regarding prices, product quality

-The products are perfect substitutes for each other because they are homogenous Characteristics of Monopolistic Market Structures[TYPE 1 ]: -There are many market participants ie many buyers and sellers in these markets -The product is slightly differentiated ie the product is heterogonous -The firms in these markets are price makers ie they set their own market price because they have more market power over the product they sell since each product is slightly differentiated -There is freedom of entry and exit of buyers and sellers to and from these markets -The firms in these markets incur advertising costs to market their slightly differentiated products and to inculcate brand loyalty among their clients -There is imperfect information between buyers and sellers because of production differentiation, price differential and product quality -The products are substitutes since they are slightly differentiated they serve the same function example bathing soap with different colors, shapes and odor Characteristics of Oligopolist Market Structures: -There are a few firms that dominate an oligopolist market or industry ie fewness is a dominant characteristic of these markets. Fewness according to the micro-economist Arthur -The reaction function of firms in an oligopolist market or industry is interdependent ie the policy action of one firm affects the action of another firm regarding a change in price, output, advertising strategy etc -Oligopolist firms are price makers ie they set their own prices -The firms in oligopolist markets tend to collude to set price for their output, output etc. There are two (2) types of collusion of oligopolist firms (a)Explicit collusion where oligopolist firms openly collude to determine price and output levels for their product where there are no strong Anti-Trust Laws and (b)Implicit collusion where oligopolists agree in more covert ways to fix price and output levels. The latter type of collusion is used in places where Anti-Trust Laws are present and strong.

-The collusion of oligopolist firms in principle lead to the creation of cartels ie cartelization of oligopolist industries results from their collusive behavior. A cartel is a group of producers (ie a producer cartel) or consumers (ie consumer cartel) that determines the price and quantity of output to be produced (producer cartel) or consumed (consumer cartel) in a market. For example the Organization of Petroleum Producing Countries or OPEC is a global producer oil cartel, The International Tin Association or ITA is also a global producer tin cartel -Oligopolist firms tend to compete on non-price criteria such as advertising, warranties, gift certificates, packaging, transportation etc because they know that price wars or price competition is counterproductive -Oligopolist firms seek to maximize their market share by trying to induce the customers of their clients away from them with better offers such as gifts, longer warranties, appealing packaging, free transportation etc -There are costs and technological barriers to the potential entry of rival competitors in oligopolist markets\industries -There is imperfect information between buyers and sellers in these markets -There are two (2) types of oligopolist markets: o (a) Differentiated oligopoly ie those oligopolist firms that sell products that are slightly differentiated example breakfast cereals or airline services, or fast foods etc and o (b)Pure Oligopoly ie those oligopolist firms that sell products that are homogenous like cooking gas or gasoline -Oligopolist firms incur advertising costs to inculcate brand loyalty among their clients particularly in differentiated oligopoly markets -There is imperfect information between buyers and sellers in oligopolist markets Characteristics of Monopolist Market Structures [ TYPE 2 ]: -There is a single-firm industry in the market ie the firm is the industry and vice versa -There are no close substitutes for the product being sold by the monopolist firm

-There are no competitors in this market ie competition is absent for the monopolist firm -The monopolist firm is a price maker ie a monopolist firm determines its own market price without facing any competitors -There are cost, technological and managerial barriers to entry in monopolist markets ie monopolist firms make it extremely difficult for potential rival firms to dislodge their monopolist status by erecting disincentives to entry -There is imperfect information between a monopolist firm and its customers regarding price, product quality etc which in the absence of competition deepens -There are no close substitutes for the product being bought and sold in the market -The monopolist may or may not incur advertising cost and the absence of competition facilitates this option for monopolist ie there is no pressure to incur these costs for marketing the product

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6. Write short notes on the following :a) Alternative Objectives of Firms b) Direct Costs and Indirect Costs c) Bundling Solution:

a) Alternative objectives of firms

Besides maximising profits, - maximise growth of firms by increasing sales and market power - maximise welfare by having more managerial power, larger office space - achieve their mission: donation to charity, cut down on disposables, encourage recycling long run survival of the firm entry prevention and risk avoidance Some important objectives, other than profit maximization are: (a) Maximization of the sales revenue (b) Maximization of firms growth rate

(c) Maximization of Managers utility function (d) Making satisfactory rate of Profit (e) Long run Survival of the firm (f) Entry-prevention and risk-avoidance Profit Business Objectives: Profit means different things to different people. To an accountant Profit means the excess of revenue over all paid out costs including both manufacturing and overhead expenses. For all practical purpose, profit or business income means profit in accounting sense plus non-allowable expenses. Economists concept of profit is of Pure Profit called economic profit or Just profit. Pure profit is a return over and above opportunity cost, i. e. the income that a businessman might expect from the second best alternatives use of his resources. Sales Revenue Maximisation: The reason behind sales revenue maximisation objectives is the Dichotomy between ownership & management in large business corporations. This Dichotomy gives managers an opportunity to set their goal other than profits maximisation goal, which most-owner businessman pursue. Given the opportunity, managers choose to maximize their own utility function. The most plausible factor in managers utility functions is maximisation of the sales revenue. The factors, which explain the pursuance of this goal by the managers are following:. First: Salary and others earnings of managers are more closely related to sales revenue than to profits Second: Banks and financial corporations look at sales revenue while financing the corporation. Third: Trend in sales revenue is a readily available indicator of the performance of the firm. Maximisation of Firms Growth rate: Managers maximize firms balance growth rate subject to managerial & financial constrains balance growth rate defined as: G = GD GC Where GD = Growth rate of demand of firms product & GC= growth rate of capital supply of capital to the firm. In simple words, A firm growth rate is balanced when demand for its product & supply of capital to the firm increase at the same time.

Maximisation of Managerial Utility function: The manager seek to maximize their own utility function subject to the minimum level of profit. Managers utility function is express as: U= f(S, M, ID) Where S = additional expenditure of the staff M= Managerial emoluments ID = Discretionary Investments The utility functions which manager seek to maximize include both quantifiable variables like salary and slack earnings; non- quantifiable variables such as prestige, power, status, Job security professional excellence etc. Long run survival & market share: according to some economist, the primary goal of the firm is long run survival. Some other economists have suggested that attainment & retention of constant market share is an additional objective of the firms. the firm may seek to maximize their profit in the long run through it is not certain. Entry-prevention and risk-avoidance, yet another alternative objectives of the firms suggested by some economists is to prevent entry-prevention can be: Profit maximisation in the long run Securing a constant market share Avoidance of risk caused by the unpredictable behavior of the new firms Micro economist has a vital role to play in running of any business. Micro economists are concern with all the operational problems, which arise with in the business organization and fall in with in the preview and control of the management. Some basic internal issues with which micro-economist are concerns: Choice of business and nature of product i.e. what to produce Choice of size of the firm i. e how much to produce Choice of technology i.e. choosing the factor-combination Choose of price i.e. how to price the commodity How to promote sales How to face price competition How to decide on new investments How to manage profit and capital How to manage inventory i.e. stock to both finished & raw material These problems may also figure in forward planning. Micro economist deals with these questions and like confronted by managers of the enterprises. ==========================================================

b)

Direct costs and indirect costs

Direct costs can be traced directly to a cost object such as a product or a department. In other words, direct costs do not have to be allocated to a product, department, or other cost object. For example, if a company produces artisan furniture, the cost of the wood and the cost of the craftsperson are direct coststhey are clearly traceable to the production department and to each item producedno allocation was needed. On the other hand, the rent of the building that houses the production area, warehouse, and office is not a direct cost of either the production department or the items produced. The rent is an indirect costan indirect cost of operating the production department and an indirect cost of crafting the product. To calculate the total cost of the production department or to calculate each products total cost, it is necessary to allocate some of the rent (and other indirect costs) to the department and to the product. Costs usually charged directly Project staff Consultants Project supplies Publications Travel Indirect costs are those for activities or services that benefit more than one project. Their precise benefits to a specific project are often difficult or impossible to trace. For example, it may be difficult to determine precisely how the activities of the director of an organization benefit a specific project. It is possible to justify the handling of almost any kind of cost as either direct or indirect. Labor costs, for example, can be indirect, as in the case of maintenance personnel and executive officers; or they can be direct, as in the case of project staff members. Similarly, materials such as miscellaneous supplies purchased in bulkpencils, pens, paperare typically handled as indirect costs, while materials required for specific projects are charged as direct costs. Indirect costs represent the expenses of doing business that are not readily identified with a particular grant, contract, project function or activity, but are necessary for the general operation of the organization and the conduct of activities it performs. In theory, costs like heat, light, accounting and personnel might be charged directly if little meters could record minutes in a cross-cutting manner. Practical difficulties preclude such an approach. Therefore, cost allocation plans or indirect cost rates are used to distribute those costs to benefiting revenue sources. Looking at it another way, indirect costs are those costs that are not classified as direct. Direct costs can be identified specifically with particular cost objectives such as a grant, contract, project, function or activity. Direct costs generally include:

Salaries are wages (including vacations, holidays, sick leave, and other excused absences of employees working specifically on objectives of a grant or contract i.e, direct labor costs). Other employee fringe benefits allocable on direct labor employees. Consultant services contracted to accomplish specific grant/contract objectives. Travel of (direct labor) employees. Materials, supplies and equipment purchased directly for use on a specific grant or contract. Communication costs such as long distance telephone calls or telegrams identifiable with a specific award or activity. Costs either charged directly or allocated indirectly Telephone charges Computer use Project clerical personnel Postage and printing Miscellaneous office supplies Costs usually allocated indirectly Utilities Rent Audit and legal Administrative staff Equipment rental ==========================================================

c)

Bundling

Bundling is a practice in sales that refers to packaging more than one item together to induce customers to purchase a main product. This can also refer to offering several services at once. For instance, a carpet cleaner could bundle services by offering free cleaning of a hall carpet with the purchase of cleaning two rooms. Bundling may furthermore refer to the "gift with purchase" concept in sales. If youre going to get something for free you may be more likely to buy something else. Often youll find examples of bundling in the computer software and gaming industry. A computer may be sold with free software bundles, and various programs that help you increase the computers functionality. Most computers come bundled with programs like web browsers , word processing programs, and office management programs. Video game systems are also likely candidates for bundling. New game systems may be sold with a game, with extra controllers, with memory cards, or a variety of other features.

Another common instance of bundling in the gamer world is expansion packs. Once a game has had several expansions or newer versions emerge, all versions of the game may be sold together. If youre a big fan of the particular game and want the most play out of it, buying bundled games can be a great way to go, because buying the expansions separately would be likely to cost more money. Though bundling may have some advantages, there are some cases where bundling is disadvantageous. For instance, when new game systems are released, they often are sold in bundle format, especially with games and extra controllers that you may not want or need. Though they represent a savings than if you were to purchase all the parts separately from the gaming system, you may not need more than one game controller, and you may not want the particular game sold with the system. Generally retailers are not allowed to unbundle things sold as a set, and people may end up having to pay quite a bit more than they want because only bundled game systems are available. ========================================================== ========================================================== =============================THE END=====================