MMPC 010 Solved Guess Paper 2026 for Managerial Economics (IGNOU MBA)

Basic concepts of decision-making

Question: Describe (a) the incremental concept, (b) the equi-marginal principle, (c) the discounting principle and (d) the opportunity cost principle.

Four principles sit behind almost every managerial choice: incremental reasoning, equi-marginal allocation, discounting and opportunity cost.

(a) Incremental concept

Incremental cost is the change in total cost caused by a change in output or investment; incremental revenue is the matching change in total revenue. A move is worth making when incremental revenue is greater than incremental cost. Every marginal concept is incremental, but not every incremental concept is marginal.

(b) Equi-marginal principle

A resource should be spread across uses until the marginal benefit per rupee of cost is the same in each use. Real changes come in lumps, so managers usually apply it as equi-incrementalism, with the same decision rule.

(c) Discounting principle

A rupee received later is worth less than a rupee today. At 5 per cent interest, ₹100 due in one year is worth ₹95.24 now, and ₹100 due in two years is worth ₹90.70. The formula is PV = R_n / (1 + i)ⁿ.

(d) Opportunity cost principle

It is the return from the next best alternative use. Keeping ₹1,000 as cash for a year costs the 10 per cent interest a fixed deposit would have paid, so every choice carries a hidden price.

The demand function and its determinants

Question: What are the variables in the demand function that influence the demand for a product? Discuss the determinants of demand and their impact.

The demand function lists every variable believed to affect demand for a product: Qd = f (Po, Pc, Ps, Yd, T, A, CR, R, E, N, O).

1. Po, own price: higher price, lower demand (the law of demand).
2. Pc, price of complements: a dearer complement pulls demand down.
3. Ps, price of substitutes: a dearer substitute pushes buyers towards this good.
4. Yd, disposable income: more spending money means more buying.
5. T, tastes: in India, bajra lost ground as people moved to rice and wheat.
6. A, advertising: own advertising lifts demand; a rival's advertising cuts it.
7. CR, availability of credit: matters most for consumer durables.
8. R, rate of interest: the price of that credit.
9. E, expectations: an expected price rise brings purchases forward.
10. N, number of potential customers: set by the target market's age or location.
11. O, other factors: seasonal swings and similar influences.

A price change moves buyers along the same curve, which is a change in quantity demanded. A change in any other determinant shifts the whole curve, which is a change in demand. The variables that cause such shifts are called shifter variables.

Cost concepts and short-run cost functions

Question: Distinguish accounting from economic costs and explicit from implicit costs. Explain short-run cost functions using TC = TFC + TVC and ATC = AFC + AVC.

Accounting cost counts only money actually paid out; economic cost adds the value of opportunities given up.

Explicit costs are payments to outsiders for inputs such as raw material, rent and advertising. Implicit costs are the opportunity cost of resources the owners already hold. If Mr. Ram leaves a ₹5 lakh job to run his own business, the accounting cost of his labour is zero, yet the economic cost is ₹5 lakh a year. Decisions look forward, so managers use economic cost.

In the short run, total fixed cost stays flat whatever the output, while total variable cost rises with output, giving TC = TFC + TVC. Dividing by output gives AFC, which keeps falling, and AVC, which falls and then rises, so ATC = AFC + AVC. Marginal cost is the extra cost of one more unit.

Oligopoly, the kinked demand curve and price leadership

Question: What is oligopolistic competition? How is price determined under oligopoly? Explain the kinked demand curve, cartels and price leadership.

Oligopoly is a market with a few sellers of a homogeneous or differentiated product, where each firm must weigh its rivals' reaction before it acts.

That interdependence is why oligopolists avoid price wars and compete on advertising and service instead. Paul Sweezy's kinked demand curve explains the resulting price rigidity: rivals match a price cut but ignore a price rise, so the demand curve bends at the current price and the firm has little reason to move either way.

Firms also cooperate. A cartel, such as OPEC, fixes prices and shares markets. Under dominant price leadership the largest firm sets the price and smaller firms follow or risk a price war. Under barometric leadership a respected firm signals the price, but it cannot force anyone to follow.

Price discrimination and its degrees

Question: What is price discrimination? Discuss its various degrees with examples.

Price discrimination is the practice of charging different prices to different consumers for the same product, and it needs monopoly power to work.

1. First degree: each unit is priced at the buyer's willingness to pay, as with the only super-specialist surgeon in town or a sealed-bid auction. The seller takes the whole consumer surplus.
2. Second degree: price depends on the volume bought, as with electricity slabs or railway fares that fall per kilometre over distance. It is also called multipart or block pricing.
3. Third degree: the market is split into groups with different elasticities, such as senior citizen airfares. The seller must keep the segments apart and stop resale between them.