CHRIST (DEEMED TO BE UNIVERSITY),BENGALURU - 560029
End Trimester Examination August - 20 18
MBA I TRIMESTER
Code: MBA132 Max.Marks: 50
Subject: MANAGERIAL ECONOMICS Duration: 2Hrs
SECTION A
Attempt any FOUR out of six questions 4X10 =40
1 With the help of two examples describe how Managerial Economics can be used by
managers. Write the steps of the Decision-making process in managerial
Economics.
2 Suppose the price elasticity of gasoline is 0.3 in the short run and 0.9 in the long
run. a.If the price of a gasoline falls from $2.50 to $2.25, what happens to the
quantity of gasoline demand in the short run and in the long run? b.Why might the
elasticity of demand for gasoline depend on time horizon?
3 Suppose the MU of good X is 20, its price is Rs. 4, and the MU of good Y is 50 and
its price is Rs. 5. The individual to whom this information applies is spending Rs. 20
on each good. Is he or she is maximizing satisfaction? Why or Why N ot?
4 How will you define economies and diseconomies of scale? How will they affect the
increasing, constant and decreasing returns to scale?
5 A monopolist face the following market demand and total cost functions:Q = 10 -
0.08P
TC = 500 - 55Q + 2.5Q 2
A. What is the profit-maximizing price (Pm) and output (Qm) for this firm?
B. At this price and quantity combination, how much is consumer surplus?
C. How much economic profit is the monopolist earning?
D. Suppose that government regulators require that the monopolist set the selling
price of their product at the long-run perfectly competitive rate. At this price, what
is consumer surplus?
6 Assume that a firm in a perfectly competitive industry has the foll0wing total cost
schedule
Output (Units) Total Cost ($)
10 $110
15 150
20 180
25 225
30 300
35 385
40 480
Calculate a marginal cos t and an average cos t s chedule for the
firm.
If the prevailing market price is $17 per unit, how many units will
be produced and s old? What are profits per unit? What are the
total Profits ?
Is the Indus try in Long run Equilibrium at this Price?
SECTION B
Compulsory Case Study 1X10 =10
7 Indian Cement Industry: Riding the High Tide.
India is the second largest producer of cement in the world, just behind china.
Indian cement industry comprises of 130 large cement plants and 365 mini cement
plants with installed capacity of 172 million tonnes per annum (mtpa). These plants
are located in states like Gujarat, Rajsthan and Madhya Pradesh.The large cement
plants account for over 94% of the total installed capacity. However two large
groups,viz the Aditya Birla Group and the Holicum Group together control more than
40% of total capacity. This apart, more than 25% of total capacity is controlled by
global majors. These include Lafarge of France, Holderbank of Switzerland and
Cemex of Mexico. The Indian cement industry is characterized by takeovers and
acquisitions, which contributes to gaining market power and this enables companies
to enjoy pricing power,which is typically oligopoly.
Cement output and consumption
India accounts for 6.4% of global production of 2.22billion tonnes of cement. Indian
cement industry has grown in terms of installed capacity and production. Cement
production increased by over 9% in FY2007, reaching 154.74mtpa,in comparison to
12.40 percent in FY 2006,7.07in FY2005 and 5.19% in FY2004.Decade-wise,Indian
cement production has increased at 8.2%(CAGR) during FY1996-2006,as compared
to 6.9 percent during 1986-1996.
Cement consumption in India has increased by more than 10.53% during FY 2007 to
148.1 mtpa compared to 134.27 in FY 2006. During the decade 1997-2007, the
cement consumption has increased by 8% at 10 yearly compound annual growth rate
(CAGR). The changing face of Indian demography, growth of nuclear families,
higher disposable income, changing pattern of spending, easily available home
loans, increased urbanization and growth of metro and semi-metro cities are some
of the vital factors behind a tremendous spurt in the housing sector. In order to keep
pace with an optimistic rate of economic growth, there is a rising demand for
commercial and retail space, IT parks and SEZ s. Another recent trend has been
initiated by the Government, with increase in investment in infrastructure, like
N ational Highway Development projects. It is expected that a construction
opportunity of over Rs.7.8 trillion will be created over next five years.
Apart from meeting the entire domestic demand, the industry is also exporting
cement and clinker. The export of cement during 2001-02 and 2003-04 was 5.14
million tonnes and 6.92 million tonnes respectively. Export during April –May,2003
was 1.35 million tonnes. Major exporters were Gujarat Ambuja Cements Ltd and
L&T Ltd.
Pricing
Cement industry has been decontrolled from price and distribution on 1st March
1989 and de-licensed on 25th July 1991.During the four year period (2003-07) cement
prices have gradually increased from around Rs.150 per bag in 2003 to Rs.230 per
bag in 2007. Cement manufacturers control over market can be gauged by the fact
that even 20-25% freight hike was straight passed on to consumers. Average
industry ROCE has reached more than 26% due to the recent burst in cement
prices. Encouraged by such lucrative returns cement manufacturers have decided to
increase capacity by more than 97million tonnes over next three years of which
43.7million tonnes is likely to complete in FY 2009. Thus, the cement supply will
increase by more than 11% in next three years.
Cement consumption growing at around 10% and production at 11% would naturally
create a situation of over production. As per estimates, cement industry will face
over capacity of 17.7 mtpa in 2008 and 37.7 in 2009.Therefore it is expected that
capacity utilization will fall significantly. Further new players are likely to join the
industry with huge production capacities.
Questions for discussion:
1. Do you think cement indus try in India pres ents a good explanation
of oligopoly? Which characteris tics of oligopoly do you find in the
above cas e?
2. How has decontrolling of cement prices helped the growth of this
indus try?
3. Do you s ee pos s ibilities of cartel or implicit collus ion in the
above cas e? How?
