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QP CODE: E05169

B.COM DEGREE CBCS PRIVATE EXAMINATION, FEBRUARY 2021

Second Semester
CO2CMT02 - PRINCIPLES OF BUSINESS DECISIONS

ANSWER SCHEME

PART A - 2 mark each (10*2 =20 marks)

1. What is Aggregate Economics?

Aggregate economics is an economic measurement of the total amount of demand for all
finished goods and services produced in an economy.

2. What is demand schedule?

Demand schedule is a table that shows the quantity demanded of a good or service at
different price levels.

3. What is meant by unit elasticity?

Unit elastic demand is referred to as a change in the price result in an equal and
proportionate change in quantity demanded.

A curve with an elasticity of 1 is unit elastic.

4. Calculate advertisement elasticity of demand if Q1= 10,000 units; Q2= 11,500 units; A1 =
Rs. 30,000;A2= Rs. 35,000

Advertisement elasticity of demand =

ie X

ie

ie = =

5. What is meant by consumer clinics?

It is a controlled laboratory experiment for demand forecasting. Here the participants are
given a sum of money and asked to spend it in simulated store. Their reactions to changes
in the commodity price, product packaging, displays, price of competitor products and
other factors affecting demand are recorded for demand forecast.
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6. What is production theory?

Production theory studies the relationship between various possible combinations of input
and output. .

7. What is meant by economies of scale?

Economies of scale are the cost advantages that enterprises obtain due to their large scale of
operation.

8. What is meant by Iso cost curve?

Iso cost curve shows the various combinations of inputs that will give the same market
cost.

9. What is envelope curve?

The long-run average cost curve (LRAC) is called envelop curve. It is made of Short-run
Average Cost curves (SRAC). It is a U-shaped curve.

10. Distinguish between pure competition and perfect competition.

Pure competition is a market which satisfies the following three conditions:

a) Existence of large number of buyers and sellers

b) Availability of identical products
c) Free entry or exit of firms.

11. What is monopolistic competition?

There are many firms that competes each other. But their products are not perfect
substitutes. They are selling differentiated products.

12. What is duopoly?

A situation in where there are only two suppliers or two dominating suppliers who share
lion majority of the market for a commodity or service.

PART B - 5 mark each (6*5 =30 marks)

13. Explain three types of environment in which decisions are made.

a) Decision making under certainty:- Accurate, measurable, and reliable information

are available to base decisions.
b) Decision making under Risk:- Incomplete information about available alternatives.
But he can predict the possibility of future outcome.
c) Decision making under uncertainty:- Neither know the possible outcomes, nor their
probabilities.
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14. Explain the concept of movement and shift in demand.

Movement in demand:- Change in demand due to a change in price is called movements
along the demand curve. This can be either expansion or contraction in demand.
y D

P2
P
Price

P1

D
o Q2 Q Q1 x
Quantity demanded

Shift in demand:- If the demand changes, when the price remains constant, it is called
shift in demand. In other words, the change in demand is caused by factors other than
price. It can be Rightward shift and Leftward shift.

y D1
D
D2
P
Price

D1
D
D2

o Q2 Q Q1 x
Quantity demanded

15. Discuss the managerial uses of income elasticity of demand

1. Helps in demand/sales forecasting.
2. Helps in revenue forecasting.
3. Helps in production planning.
4. Helps in designing marketing strategies.
5. Helps in Budgeting

16. Differentiate between increasing returns to scale and diminishing returns to scale.

Increasing Returns to Scale Diminishing Returns to Scale

1. This is the first stage of production 1. This is the second stage of production
2. The output increases in a greater 2. The output increases in a smaller
proportion than input. proportion than input.
3. Marginal product will show an 3. Marginal product will show a declining
increasing trend. trend.
4. Average product will show an increasing 4. Average product will show a declining
trend. trend.
5. Total product will show an increasing 5. Total product will show an increasing
trend. trend, but at a lower rate.
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(Give mark for explanation with and without figure. If the student draw figure and
identifies the stages as, marks can be given)

17. Distinguish between actual cost and opportunity cost.

Actual Cost Opportunity Cost

1. Price actually Paid 1. Benefit that foregone for not selecting
2. It is a real cost 2. It is an imaginary cost
3. It is used for accounting Purpose 3. It is used for economic analysis
4. They are shown as expenditure in 4. They are not shown in financial
financial statements statements
5. They can be classified into direct, 5. There is no such classification.
and indirect costs

18. What are the Objectives of pricing?

1. Ensure target return on investment (ROI) – Pricing for profit
2. Retain or increase market share- Maximise sales
3. Market penetration- Low price to stimulate the market growth
4. Prevention of Competition- low price, considering competition
5. Price Stability- Increase reputation
6. Profit maximization- Monopoly market
7. Pricing based on customer’s ability-
8. Differential pricing – different prices for different customers
9. Market skimming- High price at initial stage
10. Product line promotion- Promotes the entire line of products..

19. What are the degrees of price discrimination?

There are three types of price discrimination – first-degree, second-degree, and third-
degree.
1. First Degree (Perfect) Price Discrimination: Here the company charges different price
for every good or service sold. Eg. dynamic pricing by Indian airline industry.
2. Second Degree Price discrimination: Here a company charges a different price for
different quantities consumed. Eg. quantity discounts on bulk purchases.
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3. Third-degree price discrimination: Here a company charges a different price to

different groups of consumers. Eg. discount prices to students, senior citizen, defense
personnel, etc. by Indian Railway.

20. Explain pricing under collusion in oligopoly.

Collusion is a situation where firms join hands to gain the advantages of monopoly. It
results into a cartel (association). A cartel is a formal agreement among firms
regarding pricing and/or market sharing. Eg. OPEC
The marginal cost curves of each firm are summed horizontally to derive an industry
marginal cost curve. The profit-maximizing output and equilibrium price (P0) are
determined simultaneously by equating the cartel’s total marginal cost with the
industry marginal revenue curve.

The aggregate marginal cost curve of the industry SMC is drawn by the lateral
summation of the MC curves of firms A and B, so that SMC = MCa+ MCb.
The cartel solution that maximises joint profit is determined at point E where the SMC
curve intersects the industry MR curve. Consequently, the total output is OQ which
will be sold at price Qp = (Qf). As under monopoly, the cartel board will allocate the
industry output by equating the industry MR to the marginal cost of each firm.
(Marks can be given for good explanation of the term, or figure with explanation.)

21. Explain important pricing policies.

1. Cost-oriented pricing policy.
Include Cost plus pricing, Rate of return pricing and Break even pricing.
2. Demand based pricing policy.
Include price skimming, price discrimination, psychological pricing, bundle
pricing, penetration pricing, and value-based pricing.
3. Competition oriented pricing policy.
Include premium pricing, parity pricing and discounted pricing.
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PART C- 15 mark each (2*15 =30 marks)

22. Discuss the fundamental concepts applied in decision making.

3. The incremental Reasoning.
4. Concept of time Perspective.
5. Concept of time value of money –d iscounting Principle.
6. Opportunity Cost Principle.
7. Equi-Marginal Principle.

23. How does analysis of demand contribute to business decision making?

1. Production planning. 7. Capital expenditure decisions.

2. Forecasting sales 8. Inventory management.
3. Formulating Pricing Policy 9. Macro- economic planning.
4. Capital investment decisions 10. Launching new product.
5. Marketing decisions 11. Taking financial decisions
6. Advertisement decisions

24. Explain the law of returns to scale with the help of an example.

The laws of production describe the technically possible ways of increasing the level of
production. There are basically two laws of production: Law of Diminishing Returns and
Law of Returns to Scale. ‘Law of returns to scale’ deals with the production function in the
long run.
The law describes the relationship between inputs and output when all the inputs are
increased in the same proportion. There is no fixed factor of production in the long run.
When there is a proportionate change in the amounts of inputs, the behavior of output varies.
The output may increase by a great proportion, same proportion or in a smaller proportion to
its inputs. Accordingly there are three stages: Increasing, constant and decreasing returns.

(Provide more marks for explanation with figure or table)

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25. Explain price and output determination under Monopoly

Pricing: A monopolist can determine the price and production under monopoly. But he
cannot fix both simultaneously. He can either:
a. Fix the price and leave the demand to be determined by the market, or
b. Fix the quantity and leave the price to be determined by the market.
Determination of Output in Short runs.
He will continue to increase production till MR is not equal to zero.
Demand curve of the firm indicates the demand curve of the industry. The demand curve of
the monopolist is also the average revenue curve (AR). As shown in figure, a monopolist can
sell more quantities at a lower price only. The demand will fall at higher prices. AR is equal
to price. Marginal Revenue (MR) is less than AR.

P1
E C
P P
A B

o Q2 Q Q1 o Q
Equilibrium of a monopoly firm
Demand Curve of a monopoly
firm

Equilibrium under monopoly

Equilibrium under monopoly is attained at the point where profit is maximum, i.e. where
MR=MC.
In the given figure 5.12, MR=MC at point E, where the firm is in equilibrium. The firm gets
normal profit if the price is fixed at ‘A’, where Price=AR=ATC. Since the price is above the
Average Total Cost, the firm gets super profit. The super profit is represented by the shaded
rectangle of ABCP. Here Price is above the Average Total Cost. If the price is fixed below
the ATC, the firm will incur a loss.
Determination of Output in Long runs.
In the long run, determination of quantity of production remains the same as short run. The
firm will be in equilibrium at the level of output where given marginal revenue curve cuts the
long run marginal cost curve.
(Marks can be given for any suitable explanation)

Prepared by:
Boby Thomas
Assistant Professor of Commerce
Pavanatmacollege, Murickassery
b.athickal@pavanatmacollege.org