EXAMINATION PAPER

FACULTY : BUSINESS AND ACCOUNTANCY

COURSE : MASTER OF BUSINESS ADMINISTRATION (MBA)

YEAR/ SEMESTER : I YEAR / SEMESTER I

MODULE TITLE : BUSINESS ECONOMICS

CODE : ECO 501

DATE : 25-AUGUST, 2017, FRIDAY

TIME ALLOWED : 3 HOURS

START : 1:00 PM FINISH : 4:00 PM

Instruction to candidates

1. This question paper has THREE (3) Section

2. Answer ALL questions in Section A, MCQ.

3. Answer 5 questions in Section B, MSAQ.

4. Answer 2 questions in Section C, MEQ.

5. No scripts or answer sheets are to be taken out of the Examination Hall.

6. For Section A, answer in the OMR form provided.

Do not open this question paper until instructed

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 SECTION A
Multiple Choice Questions (30*1=30)

1. What is opportunity cost?

a) The alternative foregone
b) The choice made
c) Unlimited wants
d) Limited resources

2. The production possibility frontier shows:

a) The maximum amount of resources that an economy possesses
b) The maximum amount of two goods that an economy can produce with
fixed resources
c) The unlimited resources of an economy
d) All the goods an economy can produce while leaving some resources
idle

3. Which one is the traditional objective of the firm?

a) Profit maximization
b) Sales revenue maximization
c) Value maximization
d) Utility maximization

4. Managerial economics is best defined as:

a) The study of economics by managers
b) The study of the aggregate economic activity
c) The study of how managers make decisions about the use of scarce
resources
d) All of the above are good definitions

5. When the total revenue curve and total cost curve are parallel and TR
exceeds TC:
a) Total profit is minimized
b) Normal profit is minimized
c) Total profit is maximized
d) Normal profit is maximized

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6. In monopoly, the relationship between average revenue and marginal
revenue curve is as follows:
a) AR curve lies above the MR curve
b) AR curve lies below the MR curve
c) AR curve coincides with the MR curve
d) AR curve is parallel to MR curve

7. The cost of next best alternative is known as:

a) Money cost
b) Real cost
c) Explicit cost
d) Opportunity cost

8. Morris’s theory is connected with the______.

a) Profit
b) Sales maximization
c) Value maximization
d) Growth maximization

9. It is basically used to explore the human tendencies:

a) Profit
b) Output
c) Behavioural theory
d) None of the above

10. Ox= A- bPx is:

a) Price function
b) Income function
c) Cross function
d) Demand function

11. Total cost of production in under-developed country basically:

a) Lower
b) Higher
c) Equal with developed economies
d) Difficult to calculate

12. Tentative demand forecasting is possible with______.

a) Theoretical method
b) Statistical method
c) Barometric method
d) Time series method

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13. For equilibrium in the market, it is the sufficient condition:
a) First order derivative should be zero
b) Second order derivative should be negative
c) Both a & b
d) Mc cuts MR from its below

14. In the short run production function______.

a) All factors are variables
b) All are constant
c) Only one factor is variable
d) All are constant

15. Least cost combination is related with______.

a) Producer
b) Consumer
c) Government
d) Private sector

16. Economies of scale is______.

a) Production of goods
b) Less firms and greater items of goods
c) Higher output lower cost
d) Higher cost

17. Output increased faster than inputs is a symbol of:

a) Increasing return to scale
b) Decreasing return to scale
c) Constant return to scale
d) None

18. In duopoly which is the special form of Oligopoly Market there are______.
a) Many sellers
b) Single seller
c) Large number of sellers
d) Two sellers

19. Find out which one statement is always correct about Nash Equilibrium:
a) Any player has the incentive to change its action unilaterally
b) It is suboptimal collective strategy
c) There can be two equilibrium when both the firms simultaneously play
the same strategy
d) No player has anything to gain by changing its strategy

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20. The most popular strategies under product life cycle pricing include all the
following except:
a) Price skimming
b) Product bundling
c) Cyclical pricing
d) Perceived value pricing

21. Externalities refer to:

a) Beneficial effects of an economic unit on others
b) Detrimental effects of an economic unit on others
c) Beneficial and detrimental effects of an economic unit on others
d) Benefits for others for which payment is received

22. Sources of market failure are:

a) Public goods
b) Externalities
c) Imperfect competition and market power
d) All of the above

23. In consumer’s opinion survey buyers are asked about their:

a) Future buying intention of products
b) Their brand preferences
c) Possible response to an increase in price of product or to any probable
change in product or an implied comparison with competitors’ products
d) All of the above

24. Law of variable proportion states that as the variable factor is increased
with other fixed factor the marginal product and average product of the
variable factor will:
a) Also go up
b) Remain constant
c) Eventually decline
d) Never decline

25. A good method of demand forecasting should be:

a) Coercive
b) Flexible
c) Rigid
d) Complex

26. A firm to formulate its sales policy and sales strategy can make use of:
a) Sales forecast made by the other firms
b) Sales forecast made by the statistical organizations
c) Sales forecast made by the industry
d) Sales forecast made by the govt.

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27. Demand forecasting is made - for the______.
a) For the substitutes only
b) For the existing products only
c) New products only
d) For both the existing products & for the new products

28. Some of the external factors which influence sales forecasts of a firm are:
a) Pricing policy
b) Size of the market, competitor’s attitude, movement in prices. etc.
c) Money spent on advertisement
d) Product improvement and sales efforts

29. The heart of the survey method is______.

a) Consumer panel
b) Direct interview
c) Opinion of the sales representatives
d) Questionnaire

30. A stage of decreasing returns imply:

a) MP is negative
b) AP is negative
c) MP is decreasing
d) both a and b

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 SECTION B
Short Answers Questions
Answer any five (5) questions out of seven (7) questions (5*6=30)

1. Define managerial economics. Explains its features. (2+4)

2. Explain the significance of the price elasticity of demand in managerial decision

making.

3. The production function of a garment is Q= 400K0.5L0.5. The wage rate is Rs. 150
and interest is Rs. 75. Find the amount of factor which minimizes the cost in order
to produce 2500 units of output. Find the minimum cost.

4. Define market failure. Discuss the various sources of market failure. (1+5)

5. “Managerial economics provides the link between traditional economics and

decision sciences in managerial decision-making.”Elucidate.

6. Explain about the necessary steps in demand forecasting.

7. Suppose you are a manger of a company, whose product covers a large share of
market? Explain how you would determine the product price and output of that
product.

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 SECTION C
Long Answer Questions
Attempt any two (2) questions but question no three (3) is compulsory.(2*20=40)

1. Answer the following questions:

a. Nepalese fashion home has demand function, P = 20 – Q and total cost function
C = Q2 + 8Q + 2, determine the optimal output (Q), price (P), total revenue (R)
and total profit (π).
i. Under profit maximization (4)
ii. Under sales revenue maximization (4)
iii. Under sales revenue maximization subject to the profit constraint of Rs. 10.
(4)
b. Negative externalities cause over production whereas positive externalities
cause under production. Comment on the statement with proper reasons. How
can be these effects of externalities controlled by the government through the
policy of tax and subsidy? (4+4)

2. The law of diminishing returns is sometimes known as the law of variable

proportions. How? Explain the law with example and figure and give your
suggestion where a rational producer should operate in production and why?
(8+12)

3. Read the following case and answer the questions asked at the end:

There has been much debate about the effects of fiscal policy on economic growth
especially in developing countries because fiscal policy is regarded as a source of
productive investment as well as a source of low productivity and inefficiency.
Fiscal policy affects the total output, employment levels, and price stability by
changing the total or composition of revenues and expenditures of the
government.“Fiscal policy is predominantly viewed as an instrument to mitigate
short-run fluctuations of output and employment. By a variation in government
spending or taxation, fiscal policy aims at altering aggregate demand in order to
move the economy closer to potential output” ( Zaglerand Durnecker, 2003).
According to the neoclassical model fiscal policy cannot affect the long-run
growth of output since growth is determined by exogenous factors such as the
dynamics of population and the rate of technical progress (Solo, 1956; Swan,
1956).Endogenous growth model have challenged the long-run policy
ineffectiveness by modifying neoclassical assumptions (Barro, 1990; Lucas, 1990).
However, the noble feature of endogenous growth model is that fiscal policy can
determine the growth of the economy. The introduction of endogenous growth
model which incorporate government sectors has led to the opposite conclusion
that fiscal policies can affect the long-run growth rate of an economy (Barro, 1990;

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Barro and Sala-i-Martin, 1992).According to endogenous growth theory,
government policy can influence the growth performance of the economy.In
endogenous growth models, fiscal policy can be one of the important determinants
of the observed differences in growth performance depending heavily on the
elasticity of labor supply and on aspects of technology to accumulate human
capital and to create new goods about which very little is currently known (Jones,
Manuelli and Rossi, 1993; Stokey and Rebelo, 1995). According to the model
fiscal policy seems to be an important determinant of economic growth simply
because some fiscal policy instruments are harmful for growth while others are
not. Since the mid-1980s endogenous growth model have proposed a number of
channels through which fiscal policy can affect the rate of growth of output.
“Apart from its macroeconomic effects, fiscal policy can affect the rate of growth
of aggregate output through many channels. The impacts of public education
expenditure on human capital formation, of the provision of public sector
infrastructure on the productivity of private capital, and of capital income taxation
on saving are but three of these” (Gerson, 1998). Specifically, fiscal policy affects
growth in the endogenous growth model through several channels such as
production externalities, productivity growth, productivity differences, factor
accumulation, crowding-out, and redistribution policies (Gemmell, 2001).

Questions:
a) Explain about fiscal policy. (5)
b) How fiscal policy can affect the macro variables according to the passage?(5)
c) Explain the instruments of fiscal policy. (5)
d) Is it totally capable of explaining economic growth of a nation? (5)

****BEST OF LUCK****