Dibrugarh University Solved Question Papers: Business Economics (May' 2016)

byKumar Nirmal Prasad -

2016 (May)
COMMERCE
(General/Speciality)
1. Answer the following as directed: 1x8=8
  1. The main problems faced by the Business Managers can be divided into two parts (i) decision making and (ii) future planning. (Fill in the blank)
  2. Making successful business forecast is the responsibility of a managerial economist. (State True or False)
  3. ‘The price of the commodity’ is a factor of demand function. (State True or False)
  4. If tea and coffee are substitute goods, then the cross-price elasticity of demand will be
  1. Equal to zero.
  2. Negative.
  3. Positive.
  4. None of the above.
(Choose the correct answer)
  1. Other things remaining the same, the supply of a commodity increases with rise in its price and fall with a fall in its price. (Fill in the blanks)
  2. Define production function. Ans: ANS: IT SHOWS  FUNCTIONAL RELATIONSHIP BETWEEN FACTORS OF PRODUCTION AND OUTPUT
  3. In a perfectly competitive market, equilibrium production and profit maximisation are determined where marginal cost curve cuts marginal revenue curve from below. (Fill in the blank)
  4. A firm makes maximum profit when it is in equilibrium. (State True or False)
2. Write on the following in brief: 4x4=16

  1. Four characteristics of business economics.
  2. Four factors affecting price elasticity of demand.
  3. Increasing returns to scale.
  4. Internal economies of a business firm.
3. (a) Discuss the role and responsibilities of a business manager in business economics. 8+6=14
Ans: Role and Responsibilities of a Manager in business economics:
Success of managerial economics system is totally depends on the managerial skill of a business manager. The most important function of management of a business firms is decision making and future planning. Business decision-making is essentially a process of selecting the best out of alternative opportunities open to the firm. The process of decision-making by a manager comprises following phases:-
  1. Determining and defining the objective to be achieved.
  2. Developing and analyzing possible course of action; and
  3. Selecting a particular course of action.
A business has to perform the following duties:
  1. Reconciling, Theoretical Concepts of economics to the Actual Business Behaviour and Conditions: Managerial economics attempts to reconcile the tools, techniques, models and theories of economics with actual business practices and with the environment in which a firm has to operate. Analytical techniques of economic theory builds models by which we arrive at certain assumptions and conclusions are reached thereon in relation to certain firms. There is need to reconcile the theoretical principles based on simplified assumptions with actual business practice and develop the economic theory, if necessary.
  2. Estimating Economic Relationship:- Managerial economics plays an important role in business planning and decision making by estimating economic relationship between different business factors – income, elasticity of demand like price elasticity, income elasticity, cross elasticity and cost volume profit analysis etc. The estimates of this economic relationship can be used for purpose of business forecasts.
  3. Predicting Relevant Economic Quantities:- Sound business plans and policies for future can be formulated on the basis of economic quantities. Managerial economics helps the management in predicting various economic quantities such as:
  • Cost.
  • Profit.
  • Demand.
  • Capital.
  • Production.
  • Price etc.
Since a business manager has to work in an environment of uncertainty, future should be well predicted in the light of these quantities.
  1. Understanding Significant External Forces:- The management has to identify all the important factors that influence firm. These factors broadly divided into two parts – Internal Factors and External Factors. External factors are the factors over which a firm cannot have any control. Therefore, the plans, policies and programmes of the firm should be adjusted in the light of these factors. Important external factors affecting decision-making process of a firm are:
  • Economic System of the Country.
  • Business Cycles.
  • Fluctuations in National Income and National Production.
  • Industrial Policy of the Government.
  • Trade and Fiscal Policy of the Government.
  • Taxation Policy.
  • Licensing Policy etc.
Managerial economics plays an important role by assisting management in understanding these factors.
  1. Framing Business Policies: Managerial economics is the foundation of all business policies. All the business policies are prepared on the basis of studies and findings of managerial economics. It warns the management against all the turning points in national as well as international economy.
  2. Clear Understanding of Economic Concepts:- It gives clear understanding of various economic concepts (i.e. cost, price, demand etc.) used in business analysis. For example, the concept of cost includes ‘total’ ‘average’, ‘managerial’, ‘fixed’, ‘variable’, ‘actual cost’, and opportunity cost. Economics clarifies which cost concepts are relevant and in what context.
  3. Increases the Analytical Capabilities:- Managerial Economics provides a number of tools and methods which increases the analytical capabilities of the business analysis.
Or
(b) Discuss the various problems of an economy. 14
Ans: Basic Problems of an economic system or Problems of business economics
The problem of scarcity of resources which arises before an individual consumer also arises collectively before an economy. On account of this problem and economy has to choose between the following:
(i) Which goods should be produced and in how much quantity?
(ii) What technique should be adopted for production?
(iii) For whom goods should be produced?
These three problems are known as the central problems or the basic problems of an economy. This is so because all other economic problems cluster around these problems. These problems arise in all economics whether it is a socialist economy like that of North Korea or a capitalist economy like that of America or a mixed economy like that of India. Similarly, they arise in developed and under-developed economics alike.
1. What to produce?
There are two aspects of this problem— firstly, which goods should be produced, and secondly, what should be the quantities of the goods that are to be produced. The first problem relates to the goods which are to be produced. In other words, what goods should be produced? An economy wants many things but all these cannot be produced with the available resources. Therefore, an economy has to choose what goods should be produced and what goods should not be. In other words, whether consumer goods should be produced or producer goods or whether general goods should be produced or capital goods or whether civil goods should be produced or defense goods. The second problem is what should be the quantities of the goods that are to be produced.
2. How to produce?
The second basic problem is which technique should be used for the production of given commodities. This problem arises because there are various techniques available for the production of a commodity such as, for the production of wheat, we may use either more of labour and less of capital or less of labour or more of capital. With the help of both these techniques, we can produce equal amount of wheat. Such possibilities exist relating to the production of other commodities also.
Therefore, every economy faces the problem as to how resources should be combined for the production of a given commodity. The goods would be produced employing those methods and techniques, whereby the output may be the maximum and cost of production be the minimum.
3. For whom to produce?
The main objective of producing a commodity in a country is its consumption by the people of the country. However, even after employing all the resources of a country, it is not possible to produce all the commodities which are required by the people. Therefore, an economy has to decide as to for whom goods should be produced. This problem is the problem of distribution of produced goods and services. Therefore, what goods should be consumed and by whom depends on how national product is distributed among various people.
All the three central problems arise because resources are scarce. Had resources been unlimited, these problems would not have arisen. For example, in the event of resources being unlimited, we could have produced each and every thing we had wanted, we could have used any technique and we could have produced for each and everybody.
4. The problem of efficient use of resources: An economy has to face the problem of efficiently using its resources. Production can be increased even by improving the use of resources. Resources will be deemed to be better utilised when by reallocating them in various uses, production of a commodity can be increased without adversely affecting the production of other commodities.
5. The problem of fuller employment of resources: In many economies, especially in developing economies, there is a tendency towards under-utilisation of resources. Resources lying idle or not being utilised fully is a recurring problem in many economies. This problem is particularly acute in labour-abundant economies like that of India where large scale unemployment exists. In many economies, a vital resource like land too remains under-utilised. Resources being relatively scarce, they should not be allowed to remain idle as it is a waste.
6. The Problem of Growth: The last problem is of growth. Every economy strives to increase its production for increasing standards of living of its people. Economic growth of a country depends upon the fact as to what extent; it can increase its resources. This problem is not confined to developing economies alone. It is also faced by developed economies which strive for increasing their resources in order to increase the material comforts of their technically advanced societies
4. (a) Define price elasticity of demand. Discuss the importance of price elasticity of demand. 4+10=14
Ans: MEANING  AND  DEFINITION  OF   ELASTICITY  OF  DEMAND
The term elasticity was developed by Alfred Marshall, and is used to measure the relationship between price and quantity demanded. The law states that the price of a commodity falls, the quantity demanded of that commodity will increase, i.e. it explains only the direction of change in demand and not the extent of change. This deficiency is removed by the concept of elasticity of demand.
Elasticity means responsiveness. Elasticity of demand refers to the responsiveness of quantity demanded of a commodity to change in its price.
According to E.K. Estham, “Elasticity of demand is a measure of the responsiveness of quantity demanded to a change in price”.
According to Muyers “Elasticity of demand is a measure of the relative change in the amount purchased in response to any change in price or a given demand curve”.
According to A.K. Cairncross “The elasticity of demand for a commodity it is the rate at which quantity bought changes as the price changes.”
Price Elasticity: Price elasticity of demand may be defined as the degree of responsiveness of quantity demanded of a commodity in response to change in its price i.e. it measures how much a change in price of a good affects demand for that good, all other factors remaining constant. It is calculated by dividing the proportionate change in quantity demanded by the proportionate change in price.
EP= Proportionate change in quantity demanded/ Proportionate change in price
Importance of Elasticity of Demand
1. Determination of price policy: While fixing the price of this product, a businessman has to consider the elasticity of demand for the product. He should consider whether a lowering of price will stimulate demand for his product, and if so to what extent and whether his profits will also increase a result thereof.
2. Price discrimination: Price discrimination refers to the act of selling the technically same products at different prices to different section of consumers or in different in sub-markets. The policy of price-discrimination is profitable to the monopolist when elasticity of demand for his product is different in different sub-markets. Those consumers whose demand is inelastic can be charged a higher price than those with more elastic demand.
3. Shifting of tax burden: To what extent a producer can shift the burden of indirect tax to the buyers by increasing price of his product depends upon the degree of elasticity of demand. If the demand is inelastic the larger part of the indirect tax can be shifted upon buyers by increasing price. On the other hand if the demand is elastic than the burden of tax will be more on the producer.
4. Taxation and subsidy policy: The government can impose higher taxes and collect more revenue if the demand for the commodity on which a tax is to be levied is inelastic. On the other hand, in ease of a commodity with elastic demand high tax rates may fail to bring in the required revenue for the government. Govt., should provide subsidy on those goods whose demand is elastic and in the production of the commodity the law of increasing returns operates.
5. Importance in international trade: The concept of elasticity of demand is of crucial importance in many aspects of international trade. The success of the policy of devaluation to correct the adverse balance of payment depends upon the elasticity of demand for exports and imports of the country.
6. Importance in the determination of factors prices: Factor with an inelastic demand can always command a higher price as compared to a factor with relatively elastic demand. This helps the trade unions in knowing that where they can easily get the wage rate increased. Bargaining capacity of trade unions depend upon elasticity of demand for workers services.
7. Determination of sale policy for supper markets: Super Markets is a market where in a variety of goods are sold by a single organization. These items are generally of mass consumption. Therefore, the organization is supposed to sell commodities at lower prices than charged by shopkeepers in the other bazars. Thus, the policy adopted is to charge a slightly lower price for items whose demand is relatively elastic and the costs are covered by increased sales.
8. Pricing of joint supply products: The goods that are produced by a single production process are joint supply products. The cost of production of these goods is also joint. Therefore, while determining the prices of these products their elasticity of demand is considered.
9. Effect of use of machines on employment: The use of machines may reduce the cost of production and price. If the demand of the product is elastic then the fall in price will increase demand significantly. As a result of increased demand the production will also increase and more workers will be employed.
10. Public utilities: The nationalization of public utility services can also be justified with the help of elasticity of demand. Demand for public utilities are generally inelastic in nature. If the operation of such utilities is left in the hand of private individuals, they may exploit the consumers by charging high prices.
Or
(b) Explain the importance of elasticity of supply in business economics. Discuss the factors determining elasticity of supply. 6+8=14
Ans: Factors Determining Elasticity of Supply: Following factors affect the elasticity of supply of a commodity:
  1. Nature of the Inputs used: The elasticity of supply depends on the nature of inputs used for the production of commodity. If factors of production are those which are commonly used (and therefore easily available), supply of the commodity will be elastic. On the other hand, if specialized factors are used (which are not easily available), supply will be less elastic.
  2. Natural Constraints: The elasticity of supply is also influenced by the natural constraints in the production of a commodity. If we wish to produce more teak wood, it will take years of plantation before it becomes usable. Supply of teak wood will therefore be less elastic.
  3. Risk Taking: The elasticity of supply depends on the willingness of entrepreneurs to take risk. If entrepreneurs are willing to take risk, the supply will be more elastic. On the other hand, if entrepreneurs hesitate to take risk, the supply will be inelastic.
  4. Nature of the Commodity: Perishable goods are relatively less elastic in supply than durable goods, because it is difficult to store the perishables.
  5. Cost of Production: Elasticity of supply is also influenced by cost of production. If production is subject to law of increasing costs, then supply of such goods will be inelastic.
  6. Time Factor: Longer the time period, greater will be the elasticity of supply. Because, over a long period of time, more and more factors are easily available and their input can be changed to increase (or decrease) output of the commodity.
  7. Technique of Production: If the technique is complex and needs large stock of capital, then the supply of the commodity will be less elastic, because production cannot be easily increased. On the other hand, goods involving simple technique of production will have more elastic supply.

5. (a) What is an iso-product curve? Explain the different properties of iso-product curves. 2+12=14
Ans: Isoquants and its Properties
The word an isoquant is a locus of points, representing different combinations labour and capital .An isoquant Curve. ‘ISO’ is of Greek origin and means equal or same and ‘quant’ means quantity. An isoquant may be defined as a curve showing all the various combinations of two factors that can produce a given level of output. The isoquant shows- the whole range of alternative ways of producing- the same level of output. The modern economists are using isoquant, or ‘ISO’ product curves for determining the optimum factor combination to produce certain units of a commodity at the least cost.
Properties or Features of Isoquant
The following are the important properties of isoquants:
1. Isoquant is downward sloping to the right. This means that if more of one factor is used less of the other is needed for producing the same output.
2. A higher isoquant represents larger output.
3. No isoquants intersect or touch each other. If so it will mean that there will be a common point on the two curves. This further means that same amount of labour and capital can produce the two levels of output which is meaningless.
4. Isoquants need not be parallel to each other. It so happens because the rate of substitution in different isoquant schedules need not necessarily be equal. Usually they are found different and therefore, isoquants may not be parallel.
5. Isoquant is convex to the origin. This implies that the slope of the isoquant diminishes from left to right along the curve. This is because of the operation of the principle of diminishing marginal rate of technical substitution.
6. No isoquant can touch either axis. If an isoquant touches X axis then it would mean that without using any labour the firm can produce output with the help of capital alone. If an isoquant touches Y axis, it would mean that without using any capital the firm can produce output with the help of labour alone. This is impossible.
7.Isoquants have negative slope. This is so because when the quantity of one factor (labour) is increased the quantity of other factor (capital) must be reduced, so that total output remains the same.
Or
(b) Define expansion path. Discuss how it can be derived with the help of budget line and iso-product curve. 4+10=14
Ans: Expansion Path
As financial resources of a firm increase, it would like to increase its output. The output can only be increased if there is no increase in the cost of the factors. In other words, the level of total output of a firm increases with increase in its financial resources.
By using different combinations of factors a firm can produce different levels of output. Which of the optimum combinations of factors will be used by the firm is known as Expansion Path. It is also called Scale-line.
In the words of Stonier and Hague, “Expansion path is that line which reflects least cost method of producing different levels of output.”
Expansion path can be explained with the help of Fig. 16. On OX-axis units of labour and on OY-axis units of capital are given.
Expansion Path
The initial iso-cost line of the firm is AB. It is tangent to IQ at point E which is the initial equilibrium of the firm. Supposing the cost per unit of labour and capital remains unchanged and the financial resources of the firm increase.
As a result, firm’s new iso-cost-line shifts to the right as CD. New iso-cost line CD will be parallel to the initial iso-cost line. CD touches IQ1 at point E1 which will constitute the new equilibrium point. If the financial resources of the firm further increase, but cost of factors remaining the same, the new iso-cost line will be GH.
It will be tangent to Isoquants curve IQ2 at point E2 which will be the new equilibrium point of the firm. By joining together equilibrium points E, E1 and E2, one gets a line called scale-line or Expansion Path. It is because a firm expands its output or scale of production in conformity with this line
6. (a) What are the basic objectives of a business firm? Discuss how a firm maximizes its profit under perfect competition. 6+8=14
Ans: Objectives of Business Firms – Main and Alternative Objectives
Conventional theory of firm assumes profit maximisation, as the main objective of business firms. Recent researchers on this issue reveal that the objectives that business firms pursue are more than one. Some important alternatives objectives, other than profit maximisation, are:
  1. Maximisation of Sales Revenue.
  2. Maximisation of Firm’s growth rate.
  3. Maximisation of manager’s utility function.
  4. Long-run survival of the firm.
Alternative Objectives of Business Firms
(1) Baumol’s Hypothesis of Sales Revenue Maximisation: Baumol’s theory of sales maximisation is an alternative theory of firm’s behaviour. The basic premise of his theory is that sales maximisation, rather than profit maximisation, is the plausible goal of the business firms. The separation of ownership from management, characteristic of the modern firm, gives discretion to the managers to pursue goals which maximise their own utility and deviate from profit maximisation, which is the desirable goal of owners.
Given this discretion, Baumol argues that sales maximisation seems the most reasonable goal of managers. From his experience as a consultant to large firms, Baumol found that managers are preoccupied with maximisation of the sales rather than profits. Several reasons seem to explain this attitude of the top management.
Firstly, there is evidence that salaries and other (slack) earnings of top managers are correlated more closely with sales than with profits.
Secondly, the banks and other financial institutions keep a close eye on the sales of firms and are more willing to finance firms with large and growing sales.
Thirdly, personnel problems are handled more satisfactorily when sales are growing. The employees at all levels can be given higher earnings and better terms of work in general.
Fourthly, large sales, growing over time, give prestige to the managers, while large profits go into the pockets of shareholders.
Implications (or Superiority) of the Theory:
Baumol’s sales maximisation theory has some important implications which make it superior to the profit maximisation model of the firm.
1. The sales maximising firm prefers larger sales to profits. Since it maximises its revenue when MR is zero, it will charge lower prices than that charged by the profit maximising firm.
2. It follows from the above that the sales maximising output will be larger than the profit maximising output.
3. The sales maximiser would spend more on advertising in order to earn larger revenue than the profit maximiser subject to the minimum profit constraint.
4. There may be a conflict between pricing in the short run and the long run. In the short run when output cannot be increased, revenue can be increased by raising the price. But in the long run, it would be in the interest of the sales maximisation firm to keep the price low in order to compete more effectively for a large share of the market and thus earn more revenue.
(2) Maximisation of firm’s growth rate: According to Robin Marris managers maximize firm’s balanced growth rate. He defines firm’s balanced growth rate (G) as:
G = GD = GC
Where, GD = Growth rate of demand for firms product
GC = Growth rate of capital supply to the firm
(3) Maximisation of managerial utility function: According to this concept managers seeks to maximize their own utility function subject to a minimum level of profit.
(4) Long-run survival of the firm: According to this concept, the primary goal of the firm is long-rum survival. The managers, therefore, seeks to secure their market share and long-run survival. The firms may seek to maximize their profit in the long-run though it is not certain.
Main Objectives - Profit Maximisation Goal of a Business Firm
According to traditional economic theory profit maximisation is the sole objective of business firms. The traditional theory suggests a number of reasons as to why does a firm want to maximize profits. All these reasons essentially fall into the following categories:
  1. Traditional economic theory assumes that the firm is owner-managed, and therefore maximizing profit would imply maximizing the income of the owner; Owner would like to have adequate return for his activity as an entrepreneur.
  2. Firm may pursue goals other than profit-maximisation, but they can achieve these subsidiary goals much easier if they aim for profit maximisation.
Under perfect competition individual firms have to maximize their profits at price determined by industry. Under imperfect competition firms search their profit maximizing price output as they are price makers. The profit can be defined as the difference between total revenue and total cost. i.e. Profit = Total Revenue – Total Cost.
A firm will maximize its profit at that level of output at which the difference between total revenue and total cost is maximum. Generally conventional price theory determines profit maximizing price-output in terms of marginal cost and marginal revenue.
Marginal Revenue: Marginal revenue is the addition to total revenue from the sale of an additional unit of a commodity.
Marginal Cost: Marginal cost is the addition to total cost from the production of an additional unit of a commodity.
The two profit maximizing conditions are:
1. MC = MR: - We take first condition
  1. If MC < MR total profits are not maximized because firm will earn more profits by increasing output.
  2. If MC > MR the level of total profit is being reduced and firm can increase profit by decreasing production.
  3. If MC = MR the profits could not increase either by increasing or decreasing output and hence profits are maximized.
  4. MC cuts MR from below: - Now we take the second condition. The second condition of profit maximisation requires that MC be rising at the point of its intersection with the MR curve.
C:\Users\Office\Desktop\profit_maximisation_1.gif
Criticism of profit Maximisation Approach:
  1. The real world business environment is more complex than what convention theory of firm thought. The modern business firms face lot of risk and uncertainty. Long-run survival is more important than short-run profit.
  2. The other objectives such as – sales maximisation, growth rate maximisation etc. describe real business behavior more accurately.
  3. Profit maximisation objective cannot be realized without the exact measurement of marginal cost and marginal revenue.
  4. Profits are not only measure of firm’s efficiency.
  5. Profit maximisation assumption may require expansion of business which means more risks. But firms may prefer less profit instead of bearing additional uncertainties.
Or
(b) Explain the characteristics of a perfectly competitive market. Why does a firm under perfect competition make only normal profit in the long run? 10+4=14
Ans: Features of Perfect Competition: Different definitions given by different economists point out the distinct features of perfect competition. We can list various features which point out that the form of a market is perfectly competitive. In other words, there are some necessary conditions which must be satisfied if the market is to be perfectly competitive. We can explain these below:
  1. Large number of small, unorganized firms: The first condition which a perfectly competitive market must satisfy is concerned with the seller’s side of the market. The market must have such a large number of sellers that on one seller is able to dominate in the market. No single firms can influence the price of the commodity. These firms must be all relatively small as compared to the market as a whole. Their individual outputs should be just a fraction of the total output in the market.
  2. A large number of small, unorganized buyers: On the buyer’s side the perfectly competitive market must also satisfy this condition. There must be such a large number of buyers that no one buyer is able to influence the market price in any way. Each buyer should purchase just a fraction of the market supplies. Further the buyers should not have any king of union or organization so that they compete for the market demand on an individual basis.
  3. Homogeneous products: Another pre-requisite of perfect competition is that all the firms or sellers must sell completely identical or homogeneous goods. Their products must be considered to be identical by all the buyers in the market. There should not be any differentiation of products by sellers by way of quality, variety, colour, design, packing or other selling conditions of the product.
  4. Free entry and free exit for firms: under perfect competition, there is absolutely no restriction on entry of new firms in the industry or the exit of the firms from the industry which want to leave it. This condition must be satisfied especially for long period equilibrium of the industry.
  5. Perfect knowledge among buyers and sellers about market conditions: Another pre-requisite of perfect competition is that both buyers and sellers must be having perfect knowledge about the conditions in which they are operating. Seller must know the prices being quoted or charged by other sellers in the market from the buyers. Similarly buyers must know the prices being charged by different sellers.
  6. Perfect mobility: Another feature of perfect competition is that goods and services as well as resources are perfectly mobile between firms. Factors of production can freely move from one occupation to another and from one place to another. There is no barrier on their movement. No one has monopoly or control over the factors of production. Goods can be sold to a place where their prices are the highest. There should not be any kind of limitation on the mobility of resources.
  7. Absence of transport cost: Another feature of perfect competition is that all the firms have equal access to the market. Price of the product is not affected by the cost of transportation of goods. In other words, we can say that the market price charged by different sellers does not differ due to location of different sellers in the market. Thus, there is complete absence of transport cost of the product from one part of the market to other.
  8. Absence of selling cost: Under conditions of perfect competition, there is no need of selling costs. We know that under perfect competition, goods are completely homogeneous. Price of the product is also the same for a single product. Firms have no control over the price of the product. When they cannot change the price and when their goods are completely similar, firms need not make any expenditure on publicity and advertisement.
Long-run Equilibrium of the Firm:
In the long-run, it is possible to make more adjustments than in the short-run. The firm can adjust its plant capacity and scale of operations to the changed circumstances. Therefore, all costs are variable. Firms must earn only normal profits. In case the price is above the long-run AC curve firms will be earning supernormal profits.
Attracted by them, new firms will enter the industry and supernormal profits will be competed away. If the price is below the LAC curve firms will be incurring losses. As a result, some of the firms will leave the industry so that no firm earns more than normal profits. Thus “in the long-run firms are in equilibrium when they have adjusted their plant so as to produce at the minimum point of their long-run AC curve, which is tangent (at this point) to the demand (AR) curve defined by the market price” so that they earn normal profits.
It’s Assumptions: This analysis is based on the following assumptions:
  1. Firms are free to enter into or leave the industry.
  2. All firms are of equal efficiency.
  3. All factors are homogeneous. They can be obtained at constant and uniform prices.
  4. Cost curves of firms are uniform.
  5. The plants of firm: are equal having given technology.
  6. All firms have perfect knowledge about price and output.
Determination:
Given these assumptions, each firm of the industry will be in the following two conditions.
(1) In equilibrium, its short-run marginal cost (SMC) must equal to its long-run marginal cost (LMC) as well as its short-run average cost (SAC) and its long-run average cost (LAC) and both should be equal to MR=AR=P. Thus the first equilibrium condition is:
SMC = LMC = MR = AR = P = SAC = LAC at its minimum point, and
(2) LMC curve must cut MR curve from below.
Both these conditions of equilibrium are satisfied at point E in Figure 3 where SMC and LMC curves cut from below SAC and LAC curves at their minimum point E and SMC and LMC curves cut AR = MR curve from below. All curves meet at this point E and the firm produces OQ optimum quantity and sell it at OP price.
Long-run Equilibrium of the Firm
Since we assume equal costs of all the firms of industry, all firms will be in equilibrium m the long-run. At OP price a firm will have neither a tendency to leave nor enter the industry and all firms will earn normal profit.
(OLD COURSE)
Full Marks: 80
Pass Marks: 24
1. Answer the following as directed: 1x8=8
  1. Making successful business forecast is one of the responsibilities of a managerial economist. (State True or False)
  2. Price mechanism is based on two strong opposite forces. (State True or False) forces are demand and supply.
  3. A perfectly elastic demand curve is parallel/perpendicular to the base. (Choose the correct answer)
  4. Cross-elasticity of demand is applicable in case of two categories of goods (i) substitute goods and (ii) Complementary Goods. (Fill in the blank)
  5. Internal economies are enjoyed by a business firm due to a decrease/increase in its scale of operation. (Choose the correct answer)
  6. An iso-product curve can never be horizontal or vertical to the base. (State True or False)
  7. How many firms are there in a monopoly market? ONE
  8. Under which market form, a firm is a price taker? PERFECT COMPETITION
2. Answer the following questions in brief: 4x4=16
  1. Mention four problems of an economy.
  2. Discuss any four types of demand.
  3. Mention at least four elements of demand forecasting.
  4. Mention four characteristics of iso-product curve.
3. (a) Discuss the role and responsibilities of a manager in business economics. 7+7=14
Ans: Role and Responsibilities of a Manager in business economics:
Success of managerial economics system is totally depends on the managerial skill of a business manager. The most important function of management of a business firms is decision making and future planning. Business decision-making is essentially a process of selecting the best out of alternative opportunities open to the firm. The process of decision-making by a manager comprises following phases:-
  1. Determining and defining the objective to be achieved.
  2. Developing and analyzing possible course of action; and
  3. Selecting a particular course of action.
A business has to perform the following duties:
  1. Reconciling, Theoretical Concepts of economics to the Actual Business Behaviour and Conditions: Managerial economics attempts to reconcile the tools, techniques, models and theories of economics with actual business practices and with the environment in which a firm has to operate. Analytical techniques of economic theory builds models by which we arrive at certain assumptions and conclusions are reached thereon in relation to certain firms. There is need to reconcile the theoretical principles based on simplified assumptions with actual business practice and develop the economic theory, if necessary.
  2. Estimating Economic Relationship:- Managerial economics plays an important role in business planning and decision making by estimating economic relationship between different business factors – income, elasticity of demand like price elasticity, income elasticity, cross elasticity and cost volume profit analysis etc. The estimates of this economic relationship can be used for purpose of business forecasts.
  3. Predicting Relevant Economic Quantities:- Sound business plans and policies for future can be formulated on the basis of economic quantities. Managerial economics helps the management in predicting various economic quantities such as:
  • Cost.
  • Profit.
  • Demand.
  • Capital.
  • Production.
  • Price etc.
Since a business manager has to work in an environment of uncertainty, future should be well predicted in the light of these quantities.
  1. Understanding Significant External Forces:- The management has to identify all the important factors that influence firm. These factors broadly divided into two parts – Internal Factors and External Factors. External factors are the factors over which a firm cannot have any control. Therefore, the plans, policies and programmes of the firm should be adjusted in the light of these factors. Important external factors affecting decision-making process of a firm are:
  • Economic System of the Country.
  • Business Cycles.
  • Fluctuations in National Income and National Production.
  • Industrial Policy of the Government.
  • Trade and Fiscal Policy of the Government.
  • Taxation Policy.
  • Licensing Policy etc.
Managerial economics plays an important role by assisting management in understanding these factors.
  1. Framing Business Policies: Managerial economics is the foundation of all business policies. All the business policies are prepared on the basis of studies and findings of managerial economics. It warns the management against all the turning points in national as well as international economy.
  2. Clear Understanding of Economic Concepts:- It gives clear understanding of various economic concepts (i.e. cost, price, demand etc.) used in business analysis. For example, the concept of cost includes ‘total’ ‘average’, ‘managerial’, ‘fixed’, ‘variable’, ‘actual cost’, and opportunity cost. Economics clarifies which cost concepts are relevant and in what context.
  3. Increases the Analytical Capabilities:- Managerial Economics provides a number of tools and methods which increases the analytical capabilities of the business analysis.

Or
(b) Mention the characteristics of business economics. Discuss the different problems of business economics. 7+7=14
Ans: Nature or Characteristics of Managerial Economics:-
  1. Managerial Economics is a Science: Managerial economics is a science because it establishes relationship between causes and effects. It studies the effects of a change in price of a commodity factors and forces on the demand of a particular product. It also studies the effects and implications of the plans, policies and programmes of a firm on its sales and profit.
  2. Managerial Economics is an Art: Managerial economics may also be called an art. Because it also develops the best way of doing things. It helps management in the best and most efficient utilization of limited economic resources of the firm.
  3. Managerial Economics is a Micro Economics: Entire study of economics may be divided into two segments – Macro economics and Micro economics. Managerial economics is mainly micro-economics. Micro economics is the study of the behaviour and problems of individual economic unit. In managerial economics unit of study is firm or business organization and an individual industry. It is the problem of business firms such as problem of forecasting demand, cost of production, pricing, profit planning, capital, management etc.
  4. Managerial Economics is the Economics of firms: Managerial economics largely use that body of economic concepts and principles which is known as ‘Theory of the Firm’ or ‘Economics of the Firm’.
  5. Managerial Economics uses Macro economic Analysis: Managerial economics also uses macro-economics to analysis and understand the general business environment in which the business firm must operate. Business management must have the adequate knowledge of external forces that affect the business of the firm. The important macro-factors that affect the firm are trends in national income and expenditure, business cycle, economic policies of the government, trends in foreign trade etc.
  6. Managerial Economics is Pragmatic: It is concerned with practical problems and results. It has nothing to do with abstract economic theory which has no practical application to solve the problems faced by business firms.
  7. Managerial Economics is Normative Science: There are two types of science – Normative Science and Positive Science. Positive science studies what is being done. Normative science studies what should be done. From this point of view, it can be concluded that managerial economics is normative science because its suggests what should be done under particular circumstances.
  8. Aims at helping the management: Managerial economics aims at supporting the management in taking corrective decisions and charting plans and policies for future.
Basic Problems of an economic system or Problems of business economics
The problem of scarcity of resources which arises before an individual consumer also arises collectively before an economy. On account of this problem and economy has to choose between the following:
(i) Which goods should be produced and in how much quantity?
(ii) What technique should be adopted for production?
(iii) For whom goods should be produced?
These three problems are known as the central problems or the basic problems of an economy. This is so because all other economic problems cluster around these problems. These problems arise in all economics whether it is a socialist economy like that of North Korea or a capitalist economy like that of America or a mixed economy like that of India. Similarly, they arise in developed and under-developed economics alike.
1. What to produce?
There are two aspects of this problem— firstly, which goods should be produced, and secondly, what should be the quantities of the goods that are to be produced. The first problem relates to the goods which are to be produced. In other words, what goods should be produced? An economy wants many things but all these cannot be produced with the available resources. Therefore, an economy has to choose what goods should be produced and what goods should not be. In other words, whether consumer goods should be produced or producer goods or whether general goods should be produced or capital goods or whether civil goods should be produced or defense goods. The second problem is what should be the quantities of the goods that are to be produced.
2. How to produce?
The second basic problem is which technique should be used for the production of given commodities. This problem arises because there are various techniques available for the production of a commodity such as, for the production of wheat, we may use either more of labour and less of capital or less of labour or more of capital. With the help of both these techniques, we can produce equal amount of wheat. Such possibilities exist relating to the production of other commodities also.
Therefore, every economy faces the problem as to how resources should be combined for the production of a given commodity. The goods would be produced employing those methods and techniques, whereby the output may be the maximum and cost of production be the minimum.
3. For whom to produce?
The main objective of producing a commodity in a country is its consumption by the people of the country. However, even after employing all the resources of a country, it is not possible to produce all the commodities which are required by the people. Therefore, an economy has to decide as to for whom goods should be produced. This problem is the problem of distribution of produced goods and services. Therefore, what goods should be consumed and by whom depends on how national product is distributed among various people.
All the three central problems arise because resources are scarce. Had resources been unlimited, these problems would not have arisen. For example, in the event of resources being unlimited, we could have produced each and every thing we had wanted, we could have used any technique and we could have produced for each and everybody.
4. The problem of efficient use of resources: An economy has to face the problem of efficiently using its resources. Production can be increased even by improving the use of resources. Resources will be deemed to be better utilised when by reallocating them in various uses, production of a commodity can be increased without adversely affecting the production of other commodities.
5. The problem of fuller employment of resources: In many economies, especially in developing economies, there is a tendency towards under-utilisation of resources. Resources lying idle or not being utilised fully is a recurring problem in many economies. This problem is particularly acute in labour-abundant economies like that of India where large scale unemployment exists. In many economies, a vital resource like land too remains under-utilised. Resources being relatively scarce, they should not be allowed to remain idle as it is a waste.
6. The Problem of Growth: The last problem is of growth. Every economy strives to increase its production for increasing standards of living of its people. Economic growth of a country depends upon the fact as to what extent; it can increase its resources. This problem is not confined to developing economies alone. It is also faced by developed economies which strive for increasing their resources in order to increase the material comforts of their technically advanced societies
4. (a) What is price elasticity of demand? Explain the practical utility of price elasticity. 4+10=14
Ans: MEANING  AND  DEFINITION  OF   ELASTICITY  OF  DEMAND
The term elasticity was developed by Alfred Marshall, and is used to measure the relationship between price and quantity demanded. The law states that the price of a commodity falls, the quantity demanded of that commodity will increase, i.e. it explains only the direction of change in demand and not the extent of change. This deficiency is removed by the concept of elasticity of demand.
Elasticity means responsiveness. Elasticity of demand refers to the responsiveness of quantity demanded of a commodity to change in its price.
According to E.K. Estham, “Elasticity of demand is a measure of the responsiveness of quantity demanded to a change in price”.
According to Muyers “Elasticity of demand is a measure of the relative change in the amount purchased in response to any change in price or a given demand curve”.
According to A.K. Cairncross “The elasticity of demand for a commodity it is the rate at which quantity bought changes as the price changes.”
Price Elasticity: Price elasticity of demand may be defined as the degree of responsiveness of quantity demanded of a commodity in response to change in its price i.e. it measures how much a change in price of a good affects demand for that good, all other factors remaining constant. It is calculated by dividing the proportionate change in quantity demanded by the proportionate change in price.
EP= Proportionate change in quantity demanded/ Proportionate change in price
Utility of Elasticity of Demand
1. Determination of price policy: While fixing the price of this product, a businessman has to consider the elasticity of demand for the product. He should consider whether a lowering of price will stimulate demand for his product, and if so to what extent and whether his profits will also increase a result thereof.
2. Price discrimination: Price discrimination refers to the act of selling the technically same products at different prices to different section of consumers or in different in sub-markets. The policy of price-discrimination is profitable to the monopolist when elasticity of demand for his product is different in different sub-markets. Those consumers whose demand is inelastic can be charged a higher price than those with more elastic demand.
3. Shifting of tax burden: To what extent a producer can shift the burden of indirect tax to the buyers by increasing price of his product depends upon the degree of elasticity of demand. If the demand is inelastic the larger part of the indirect tax can be shifted upon buyers by increasing price. On the other hand if the demand is elastic than the burden of tax will be more on the producer.
4. Taxation and subsidy policy: The government can impose higher taxes and collect more revenue if the demand for the commodity on which a tax is to be levied is inelastic. On the other hand, in ease of a commodity with elastic demand high tax rates may fail to bring in the required revenue for the government. Govt., should provide subsidy on those goods whose demand is elastic and in the production of the commodity the law of increasing returns operates.
5. Importance in international trade: The concept of elasticity of demand is of crucial importance in many aspects of international trade. The success of the policy of devaluation to correct the adverse balance of payment depends upon the elasticity of demand for exports and imports of the country.
6. Importance in the determination of factors prices: Factor with an inelastic demand can always command a higher price as compared to a factor with relatively elastic demand. This helps the trade unions in knowing that where they can easily get the wage rate increased. Bargaining capacity of trade unions depend upon elasticity of demand for workers services.
7. Determination of sale policy for supper markets: Super Markets is a market where in a variety of goods are sold by a single organization. These items are generally of mass consumption. Therefore, the organization is supposed to sell commodities at lower prices than charged by shopkeepers in the other bazars. Thus, the policy adopted is to charge a slightly lower price for items whose demand is relatively elastic and the costs are covered by increased sales.
8. Pricing of joint supply products: The goods that are produced by a single production process are joint supply products. The cost of production of these goods is also joint. Therefore, while determining the prices of these products their elasticity of demand is considered.
9. Effect of use of machines on employment: The use of machines may reduce the cost of production and price. If the demand of the product is elastic then the fall in price will increase demand significantly. As a result of increased demand the production will also increase and more workers will be employed.
10. Public utilities: The nationalization of public utility services can also be justified with the help of elasticity of demand. Demand for public utilities are generally inelastic in nature. If the operation of such utilities is left in the hand of private individuals, they may exploit the consumers by charging high prices.
Or
(b) What do you mean by elasticity of demand? Explain different methods of measurement of price elasticity of demand. 3+11=14
Ans: MEANING  AND  DEFINITION  OF   ELASTICITY  OF  DEMAND
The term elasticity was developed by Alfred Marshall, and is used to measure the relationship between price and quantity demanded. The law states that the price of a commodity falls, the quantity demanded of that commodity will increase, i.e. it explains only the direction of change in demand and not the extent of change. This deficiency is removed by the concept of elasticity of demand.
Elasticity means responsiveness. Elasticity of demand refers to the responsiveness of quantity demanded of a commodity to change in its price.
According to E.K. Estham, “Elasticity of demand is a measure of the responsiveness of quantity demanded to a change in price”.
According to Muyers “Elasticity of demand is a measure of the relative change in the amount purchased in response to any change in price or a given demand curve”.
According to A.K. Cairncross “The elasticity of demand for a commodity it is the rate at which quantity bought changes as the price changes.”
Measurement of Elasticity of Demand
Elasticity of demand can be measured through three popular methods. These methods are:
1. Percentage method or Arithmetic method
2. Total Outlay method
3. Graphic method or point method.
4. ARC Method
5. Revenue Method
1. Percentage method: According to this method elasticity is estimated by dividing the percentage change in amount demanded by the percentage change in price of the commodity.
ep = [Percentage change in demand / Percentage change in price]
In this method, three values of ‘ep’ can be obtained. Viz., ep = 1, ep > 1, ep > 1.
If 5% change in price leads to exactly 5% change in demand, i.e. percentage change in demand is equal to percentage change in price , e = 1, it is a case of unit elasticity.
If percentage change in demand is greater than percentage change in price, e > 1, it means the demand is elastic.
If percentage change in demand is less than that in price, e > 1, meaning thereby the demand is inelastic.
2. Total Outlay Method: The elasticity of demand can be measured by considering the changes in price and the consequent changes in demand causing changes in the total amount spent on the goods. The change in price changes the demand for a commodity which in turn changes the total expenditure of the consumer or total revenue of the seller.
If a given change in price fails to bring about any change in the total outlay, it is the case of unit elasticity. It means if the total revenue (price x Quantity bought) remains the same in spite of a change in price, ‘ep’ is said to be equal to 1
If price and total revenue are inversely related, i.e., if total revenue falls with rise in price or rises with fall in price, demand is said to be elastic or e > 1.
When price and total revenue are directly related, i.e. if total revenue rises with a rise in price and falls with a fall in price, the demand is said to be inelastic pr e < 1.
3. Graphic method or Point method: Graphic method is otherwise known as point method or Geometric method. According to this method elasticity of demand is measured on different points on a straight line demand curve. The price elasticity of demand at a point on a straight line is equal to the lower segment of the demand curve divided by upper segment of the demand curve.
4. ARC method: The concept of ARC elasticity was provided by Dalton and than it was further developed by Lerner. This method for the measurement of price elasticity of demand is applied when the change in price is somewhat large or the price elasticity over an ARC of demand is provided. ARC elasticity of demand is the elasticity between distinct points on the demand curve. It is an increase of average responsiveness to price change shown by a demand curve. Any two points on demand curve make an ARC.
5. Revenue Method: Mrs. Joan Robinson has given this method. She says that elasticity of demand can be measured with the help of average revenue and marginal revenue. 
5. (a) Discuss the law of variable proportions with the help of suitable diagram. 14
Ans: Law of Variable Proportion
Meaning: The law of variable proportion is one of the fundamental laws of economics. It is also known as the 'Law of Diminishing Marginal Returns' or the 'Law of Diminishing Marginal Productivity.' This Law of variable proportion shows the input-output relationship or production function with one variable factor, i.e., a factor, which can be changed, while other factors of production are kept constant.
In short-period when the output of a good is sought to be increased by way of additional application of the variable factor, law of variable proportions comes into operation. When the number of one factor is increased while all other factors remain constant, then the proportion between the factors is altered. On account of change in the proportion of factors there will also be a change in total output at different rates. In economics, this tendency is called Law of Variable Proportions. The law stats that as the proportion of factors is changed, the total production at first increases more than proportionately, then equi-proportionately and finally less than proportionately.
According to Samuelson, “The law states than an increase in some inputs relative to other fixed input will, in a given state of technology, cause total output to increase, but after a point the extra output resulting from the same addition of extra inputs is likely to become less and less.”
Assumptions: The law of variable proportions functions is based on following assumptions:
  1. Constant technology: The technology is assumed to be constant because technological changes will result into rise of marginal and average product.
  2. Snort-run: The law operates in the short-run because it is here that some factors are fixed and others are variable. In the long-run, all factors are variable.
  3. Homogeneous input: The variable input employed is homogeneous or identical in amount and quality.
  4. Use of varying amount of variable factor: It is possible to use various amounts of a variable factor on the fixed factors of production.  
Explanation of the Law: Law of variable proportion can be explained with the help of following table and diagram:
Units of Land
Units of Labour
Total Product
Marginal Product
Average Product
1
1
2
2
2
1
2
5
3
2.5
1
3
9
4
3
1
4
12
3
3
End of the first State Beginning of the Second Stage
1
5
14
2
2.8
1
6
15
1
2.5
1
7
15
0
2.1
End of the Second Stage Beginning of the Third Stage
1
8
14
-1
1.7
C:\Users\Office\Desktop\images.jpg
Explanation: From the above Table and Diagrams drawn on the assumption that production obeys the law of variable proportions, one can easily discern three stages of production. These are elucidated in the following table:
Three States of Production
States
Total Product
Marginal Product
Average Product
1. Stage
Initially it increases at an increasing rate. Later at diminishing rate.
Initially increases and reaches the maximum point. The starts decreasing.
Increases and reaches its maximum point
2. Stage
Increases at diminishing rate and reaches its maximum point.
Decreases and becomes zero.
After reaching its maximum begins to decrease.
3. Stage
Begins to fall
Becomes Negative.
Continues to diminish.

Causes of Applicability: Main causes accounting for the application of the law of variable proportions are as follows:
  1. Under utilization of Fixed Factor: In the initial stage of production, fixed factor of production like land or machine is under-utilized. More units of variable factor, like labour are needed for its proper utilization. Thus, as a result of employment of additional units of variable factor there is proper utilization of fixe factor. Consequently, total production begins to increase.
  2. Fixed Factors of production: The principal cause of the operation of this law is that some of the factors of production are fixed during the short period. When the fixed factor is used with variable factor, then its ratio if compared to variable factor falls. Production is the result of the cooperation of all factors. Consequently, marginal return of the variable factor begins to diminish.
  3. Optimum Production: After making the optimum use of a fixed factor if it is combined with increasing units of variable factor, then the marginal return of such variable factor begins to diminish.
  4. Imperfect Substitute: It is the imperfect substitution of factors that is mainly responsible for the operation of the law of diminishing returns. One factor cannot be used in place of the other factor. Consequently, when fixed and variable factors are not combined in an appropriate ratio, the marginal return of the variable factors begins to diminish.
Postponement of the Law: Postponement of the law of variable proportions is possible under the following conditions:
  1. Improvement in Technique of Production: Operation of the law can be postponed if along with the increase in variable factors technique of production is improved.
  2. Perfect Substitute: The law can also be postponed if factors of production are made perfect substitutes, i.e. when one factor can be substituted for the other.

Or
(b) What do you mean by economies and diseconomies of large-scale production? Discuss the different factors influencing economies and diseconomies of large-scale production. 6+8=14
Internal and External Economies
Now-a-days, goods are produced on a very large scale in modern factories. When the production is carried on a large scale the producer derives a number of advantages or economies. These advantages of large scale production are called economies of scale. This is the reason why entrepreneurs try to expand the size of their factories. Marshall divides the economies of scale into groups – (i) internal economies and (ii) external economies.
Economies of Scale
Internal Economies External Economies


Real Economies Pecuniary Economies
1. Economies of Concentration
2. Economies of Information
3. Economies of Disintegration
1. Labour Economies
2. Technical Economies
3. Inventory Economies
4. Selling or Marketing Economies
5. Managerial Economies
6. Transport and Storage Economies
  1. Internal Economies: Internal Economies: A producer drives a number of advantages when he expands the size of his factory. These advantages are called internal economies. They arise because of increase in the scale of production (i.e. output that can be produced). These are secured only by the firm expanding its size. They are dependent on the efficiency of the organizer and his resources. So internal economies are those advantages which are obtained by a producer when he increases or expands the size of his firm. Internal economies are divided into various classes as follows. When a firm increases its scale of production it enjoys several economies. These economies are called internal economies.
Types of Internal Economies: There are two types of internal economies:
  1. Real Economies: Real economies are those which are associated with a reduction in the physical quantity of inputs, raw materials, various types of labour and various types of capital. Real economies can be of six types –
  1. Labour Economies or Specialization: Specialization means to perform just one task repeatedly which makes the labour highly efficient in its performance. This adds to the productivity and efficiency of the labour.
  2. Technical Economies: Technical economies are those economies which are related with the fixed capital that includes all types of machines & plants. Technical economies are of three types:
  1. Economies of Increased Dimension.
  2. Economies of Linked Processes.
  3. Economies of the use of By-Product.
  1. Inventory Economies: A large size firm can enjoy several types of inventory economies; a big firm possesses large stocks of raw material.
  2. Selling or Marketing Economies: A firm producing a large scale also enjoys several marketing economies in respect of scale of this large output.
  3. Managerial Economies: A firm producing on large scale can engage efficient & talented managers.
  4. Transport and Storage Economies: A firm producing on large scale enjoys economies of transport & storage.
  1. Pecuniary Economies: Pecuniary economies are economies realized from playing lower prices for the factors used in the production and distribution of the product due to bulk-buying by the firm as its size increases.
  1. External Economies: When the number of factories producing the same commodity like sugar increases, we say that the particular industry (sugar industry) has developed. When the industry as a whole develops, every firm in the industry derives man advantages. These advantages are called external economies. They are enjoyed by all the firms in the industry. They are not the property or monopoly of any firm. The following are the main types of external economies:
  1. Economies of Concentration: When several firms of an industry establish themselves at one place, then they enjoy many benefits together, e.g. availability of developed means of communications and transport, trained labour, by products, development of new inventions pertaining to that industry etc.
  2. Economies of Information: When the number of firms in an industry increase, then it becomes possible for them to have concerted efforts and collective activities.
  3. Economies of Disintegration: when an industry develops, the firms engaged in its mutually agree to divide the production process among themselves.
Internal and External Diseconomies of Scale
The term diseconomies of scale refer to a situation where an increase in the size of the firm leads to a rising average cost. Diseconomies of scale may be classified into internal diseconomies and external diseconomies of scale.
The major internal diseconomies of scale arise from its size of the firm, technical causes and managerial problems. When a firm achieves a size where it is producing at the lowest possible average cost it is said to be at its optimum size. The optimum size will very over time as technological progress change the technique of production. In addition to this, more loaded men and machinery leads to machine fault and human failure cause breakdown of production.  When the size increases management becomes more complex and difficult. Managerial function of co-ordination, consultation and interdepartmental decision making will get delayed due to the size.  There will be possibility of delay in implementation of decision within the organization. Delay in communication will reduce the involvement of the employees. 
There are some external diseconomies of scale in the form of disadvantages:
  • There is shortage of labour which causes a wage rise.  
  • Increase in the demand for raw materials will also bid up prices. 
  • When there is heavy localization of industries, the land for expansion will become increasingly scarce.  Scarcity will cause an increase in the price to purchase land or to rent. 
  • Transport costs may also rise because of increased congestion. 
The change in output will cause a movement along the long run average cost curve. One of the most significant influences is external economies of scale.  If external economies are experienced, the long run average cost will shift down (output will be now be cheaper to produce).  Whereas external diseconomies of scale are encountered the long run average cost curve will move up (output will now be costlier to produce).  Improved technology would lower the long run average cost curve.
6. (a) State the features of a perfectly competitive market. Explain the conditions of short-run equilibrium of a firm under perfect competition. 8+6=14
Or
(b) How does a businessman fix his equilibrium price in monopoly market? Discuss the factors influencing the fixation of this price. 5+9=14
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