Managerial Economics
Section A: Objective Type & Short Questions (30 marks)
 This section consists of multiple choices & Short notes type questions.
 Answer all the questions.
 Part one carries 1 mark each & Part two carries 5 marks each.
Part one:
Multiple choices:
1. It is a study of economy as a whole.
a. Macroeconomics
b. Microeconomics
c. Recession
d. Inflation
2. A comprehensive formulation which specifies the factors that influence the demand for the product.
a. Market demand
b. Demand schedule
c. Demand function
d. Income effect
3. It is computed when the data is discrete and therefore incremental changes is measurable.
a. Substitution effect
b. Arc elasticity
c. Point elasticity
d. Derived demand
4. Goods & services used for final consumption is called:
a. Demand
b. Consumer goods
c. Producer goods
d. Perishable goods
5. The curve at which satisfaction is equal at each point.
a. Marginal utility
b. Cardinal measure of utility
c. The Indifference Curve
d. Budget line
6. Costs that are reasonably expected to be incurred in some future period or periods are:
a. Future costs
b. Past costs
Examination Paper of Managerial Economics
IIBM Institute of Business Management 2
c. Incremental costs
d. Sunk costs
7. Condition when the firm has no tendency either to increase or to contract its output:
a. Monopoly
b. Profit
c. Equilibrium
d. Market
8. Total market value of all finished goods & services produced in a year by a country’s residents is
known as:
a. National income
b. Gross national product
c. Gross domestic product
d. Real GDP
9. The sum of net value of goods & services produced at market prices:
a. Government expenditure
b. Product approach
c. Income approach
d. Expenditure approach
10. The market value of all the final goods & services made within the borders of a nation in an year.
a. Globalization
b. Subsidies
c. GDP
d. GNP
Part Two:
1. Discuss the concept of Demand Schedule.
2. Explain the law of ‘Diminishing marginal returns’.
3. List the various forms of Market Structure.
4. What are the various methods of measuring national income?
Section B: Case lets (40 marks)
 This section consists of Case lets.
 Answer all the questions.
 Each Case let carries 20 marks.
 Detailed information should form the part of your answer (Word limit 150 to 200 words).
Examination Paper of Managerial Economics
IIBM Institute of Business Management 3
Case let 1
The war on drugs is an expensive battle, as a great deal of resources go into catching those who buy or
sell illegal drugs on the black market, prosecuting them in court, and housing them in jail. These costs
seem particularly exorbitant when dealing with the drug marijuana, as it is widely used, and is likely no
more harmful than currently legal drugs such as tobacco and alcohol. There’s another cost to the war on
drugs, however, which is the revenue lost by governments who cannot collect taxes on illegal drugs. In a
recent study for the Fraser Institute, Canada, Economist Stephen T. Easton attempted to calculate how
much tax revenue the government of the country could gain by legalizing marijuana. The study estimates
that the average price of 0.5 grams (a unit) of marijuana sold for $8.60 on the street, while its cost of
production was only $1.70. In a free market, a $6.90 profit for a unit of marijuana would not last for
long. Entrepreneurs noticing the great profits to be made in the marijuana market would start their own
grow operations, increasing the supply of marijuana on the street, which would cause the street price of
the drug to fall to a level much closer to the cost of production. Of course, this doesn’t happen because
the product is illegal; the prospect of jail time deters many entrepreneurs and the occasional drug bust
ensures that the supply stays relatively low. We can consider much of this $6.90 per unit of marijuana
profit a risk-premium for participating in the underground economy. Unfortunately, this risk premium is
making a lot of criminals, many of whom have ties to organized crime, very wealthy. Stephen T. Easton
argues that if marijuana was legalized, we could transfer these excess profits caused by the risk premium
from these grow operations to the government: If we substitute a tax on marijuana cigarettes equal to the
difference between the local production cost and the street price people currently pay – that is, transfer
the revenue from the current producers and marketers (many of whom work with organized crime) to the
government, leaving all other marketing and transportation issues aside we would have revenue of (say)
$7 per [unit]. If you could collect on every cigarette and ignore the transportation, marketing, and
advertising costs, this comes to over $2 billion on Canadian sales and substantially more from an export
tax, and you forego the costs of enforcement and deploy your policing assets elsewhere. One interesting
thing to note from such a scheme is that the street price of marijuana stays exactly the same, so the
quantity demanded should remain the same as the price is unchanged. However, it’s quite likely that the
demand for marijuana would change from legalization. We saw that there was a risk in selling
marijuana, but since drug laws often target both the buyer and the seller, there is also a risk (albeit
smaller) to the consumer interested in buying marijuana. Legalization would eliminate this risk, causing
the demand to rise. This is a mixed bag from a public policy standpoint: Increased marijuana use can
have ill effects on the health of the population but the increased sales bring in more revenue for the
government. However, if legalized, governments can control how much marijuana is consumed by
increasing or decreasing the taxes on the product. There is a limit to this, however, as setting taxes too
high will cause marijuana growers to sell on the black market to avoid excessive taxation. When
considering legalizing marijuana, there are many economic, health, and social issues we must analyze.
One economic study will not be the basis of Canada’s public policy decisions, but Easton’s research does
conclusively show that there are economic benefits in the legalization of marijuana. With governments
scrambling to find new sources of revenue to pay for important social objectives such as health care and
education expect to see the idea raised in Parliament sooner rather than later.
1. Plot the demand schedule and draw the demand curve for the data given for Marijuana in the case
2. On the basis of the analysis of the case above, what is your opinion about legalizing marijuana in
Examination Paper of Managerial Economics
IIBM Institute of Business Management 4
Case let 2
Case 1: The Stock Market
The stock market is very close to a perfect competitive market. The price of a stock usually is
determined by the market forces of demand and supply of the stock and individual buyers and sellers of
the stock have little effect on price (they are price-takers). Resources are mobile as stock is bought and
sold frequently. Information about prices and quantities is readily available. Funds flow into stocks and
resources flow into uses in which the rate of return. Thus stock prices provide the signal for efficient
allocation of investment in the economy. However, imperfections occur here also though the stock
market is very close to a perfect competition, for example, sale of huge amount of stocks by a large
corporation will certainly affect (depress) the price of its stocks.
1. Find out the characteristic of National Stock Exchange.
Section C: Applied Theory (30 marks)
 This section consists of Applied Theory Questions.
 Answer all the questions.
 Each question carries 15 marks.
 Detailed information should form the part of your answer (Word limit 200 to 250 words).
1. What do you understand by Monitory Policy? Discuss roles and functions of RBI.
2. What is the concept of law of demand? Discuss Elasticity of Demand in detail.