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Part -2 1. Define ‘Arc Elasticity’? Arc Elasticity: The arc elasticity is a measure of average elasticity, that is the elasticity at the midpoint of the chord that connects the two points (A and B) on the demand curve by the initial and new price levels. The measure of arc elasticity is an approximation of the true elasticity of the section AB of the demand curve. The more convex to the origin the demand curve is the poorer the linear approximation attained by the arc elasticity formula. 2. Explain the law of ‘Diminishing marginal returns’.

The marginal utility refers to the change in satisfaction which results when a little more or little less of that good is consumed. The law of diminshing marginal utility says that with the increase in the consumption of a good there is a decrease in the marginal utility that person derives from consuming each additional unit of that product. 3. What is ‘Prisoner’s Dilemma’, of non cooperative game? Game theory can be used to model a wide variety of human behavior in small number and large number economic, political, and social settings.

The choice settings in which economists most frequently apply game theory, however, are small number settings in which individual decisions and welfare are interdependent. In such settings, each person’s welfare depends, in part, on the decisions of other individuals “in the game. ” i. In Cournot duopoly, each firm’s profits depend upon its own output decision and that of the other firm in the market. ii. In a setting where pure public goods are consumed, one’s own consumption of the public good depends in part on one’s own production level of the good, and, in part, on that of all others.

For example, after a snow fall, the amount of snow on neighborhood sidewalks depends partly on your own efforts at shoveling and partly that of all others in the neighborhood. iii. Game theoretic treatments are less interesting in cases where there are no interdepencies. For example, a case where there is no interdependence it that of a producer or consumer in perfect competition. Here a consumer (or firm) is able to buy 4. What is ‘Third degree Discrimation’? Third degree Discrimation market separated into two or more segments. * E. G airline s segment business & leisure Also called market segmentation * Most common * Reduces consumer surplus * Market segments must have different elasticities of D * MC= MR in each market * Consumers with more inelastic D pay higher P Caselet1 1. Are the problem faced by the company periodic in nature, and when would the bad period over the problems cease to persist? The problems faced by the company is periodic in nature. According to the given comprehension its clear that the company is facing problem because of the sluggishness in international and domestic market.

The other reasons that tightened the situation were heavy interest rates followed by the fall of rupees against dollars. The company’s financial status were healthy in the 1995-1996 and started to decline by the temporary problems in international and domestic markets The change in this worst scenario is expected to resolve when the global market reaches its normal level, along with the rehabilitation steps that were taken to tackle the financial crisis comes into effect. 2. Is there a case for shifting the business focus from the Indian marketing to export to foreign countries?

Yes, the shift of focus from local market to international market is quite visible. In the current financial year the profit through export is 160. 9 crores which inturn compared to the previous financial year (1994-1995) was 90% increase , in the previous financial year the company has earned just 80 crores. The foreign exchange outgo in the current year was 28% better than the previous year , where they profit 213 crore . As there was an immense increase through foreign export. The company is on track to shift its business for a better market. . Is there a case for restructuring and the business process re-engineering so that certain problem and its impact are under control? A rehabilitation scheme is under progress to save the company from the present crisis. There seems to be a lot of revamps to solve the current issues by various finance plans. There were plans to sell the equity shares of the company to foreign investors which would help them to earn a wholesome of Rs. 100 crores , There has been a rise in the share price in order to gather a much more better sum . oint venture talks are under progress for the steel plans which will make a better impact in solving this backdrop. These are the steps that were taken to reconstruct the business process. 4. what would you recommend as a mission and goal to the company? The company should set up a short term and a long time mission. The short time mission can be solving the current crisis, Eventhough its not an easy and custom the fit solution not available too, the company has to concentrate more in making the financial status strong. nce the situation is under control the company can try to increase the revenue by entering into fields with limited and calculated risk. the revenue can also be increased by concentrating more on international market by setting up a strong foot in it. These can be the missions and goals for the company Caselet 2 1. How long can an industry sustain on protection? 2. What is the impact of incidental services like assembly testing marketing etc. on the total cost? 3. Would you agree to the suggestion for a compete changeover to wooden cabinet? 4. Would it is desirable to import the components rather than make them in India?

Section- C 1. Free trade promotes a mutually profitable regional division of labour, greatly enhances the potential real national product of all nations and makes possible higher standards of living all over the globe. ” Critically explain and examine the statement. A. Liberal trade and the concept of comparative advantage The multilateral trading system is based on the philosophy of liberal trade, aiming to promote mutually beneficial specialisation and to enhance the potential for economic growth, thereby contributing to higher standards of living5.

The concept underlying the philosophy of liberal trade is known as comparative advantage, referring to the special ability of a country to provide one product or service at a relatively lower cost than other products or services. The theory of comparative advantage was developed by David Ricardo in 1817 as the fundamental analytical explanation for the source of gains from trade. According to the theory, each country has a benefit in specialising in and trading the commodity for which it has a relative cost advantage relative to commodities produced in other countries6. B. The equilibrium of rights and obligations

The rule-oriented structure of the General Agreement is felt to enhance the predictability necessary for a smooth operation of economic activities; to contribute to protecting economically weaker countries from economic pressures of more powerful countries; and more generally, to prevent the escalation of international tensions. However, this rule-oriented structure is only one aspect of the system, which has to be viewed at the same time as a binding contract among 109 countries7, introducing an equilibrium of rights and obligations that the contracting parties have voluntarily accepted as being in their mutual interest.

This contract, which incorporates negotiated tariff commitments contained for each country in a schedule of tariff concessions, provides a stable basis for trade by affording a certain degree of predictability for market access. Concessions are bound in the sense that contracting parties cannot set tariff levels which exceed them and have to grant compensation to affected parties if they withdraw them. C. The concept of nullification or impairment Benefits accruing to contracting parties under the General Agreement (or ther covered agreements in the framework of the WTO) have to be preserved in order to maintain the negotiated equilibrium. Nullification or impairment of such benefits, or, more generally, impediment of the objectives of the Agreements, gives the affected party the right to seek adjustment by virtue of GATT Article XXIII. The multilateral trading rules have to be understood as aimed at ensuring this equilibrium by limiting the scope for countries to undermine benefits through resort to other, often less transparent, trade measures.

Consequently, measures taken by Members may nullify or impair benefits accruing to other Members, or otherwise impede objectives of the Agreements, whether or not such measures violate the Agreements. Nullification, impairment or impediment resulting from “non-violating” measures can be introduced to the WTO dispute settlement mechanism8. D. The concept of transparency The concept of transparency is an essential concept in democratic legal systems. In its general sense, it implies guaranteeing that certain types of information which are deemed of particular importance to society at large are made generally available.

From an economic point of view, it aims at providing essential economic information to consumers, as well as ensuring the equality of competitive conditions among producers. In this specific sense, it was taken up in the framework of the multilateral trading 6 system with a view to creating confidence among Members, facilitating investment and production decisions by the private sector and, in general, enhancing the security and predictability of market access and helping to avoid trade disputes.

It refers more particularly to the transparency of both national trade and trade-related measures and the way such measures are administered. Transparency takes the form of a number of notification requirements contained in the GATT and in many WTO Agreements. GATT Article X calls for the prompt publication of domestic and international trade regulations made effective by any contracting party, in order to enable governments and traders to become acquainted with them.

The 1979 Understanding Regarding Notification, Consultation, Dispute Settlement and Surveillance requires the notification of the adoption of trade measures affecting the operation of the GATT, where possible in advance of implementation9. The TBT Agreement calls for the publication and notification of proposed standards and technical regulations likely to have significant effects on the trade of other parties, and which are not substantially based on relevant international standards10, while the SPS Agreement requires the prompt publication of all adopted sanitary and phytosanitary regulations11.

E. Additional concepts incorporated into the trading system Despite the importance of the objective of liberal trade for the multilateral trading system, this objective is complemented by provisions whose aim is to accommodate other policy objectives, such as environmental protection, although the level of accommodation of such other objectives remains a matter of discussion.

Consequently, a number of additional concepts, relevant to those other objectives, have been incorporated into the framework of trade provisions which aim at ensuring that the fulfilment of those objectives does not create unnecessary obstacles to trade. The GATT Agreement and the new WTO Agreement also recognise the existence of other policy objectives, and the preamble to the latter refers explicitly to the objective of sustainable development.

The concept of harmonisation is incorporated into the TBT Agreement, which stresses “the important contribution that international standards and conformity assessment systems can make (to further the objectives of GATT 1994) by improving efficiency of production and facilitating the conduct of international trade”, while recognising that countries should not be prevented from adopting the measures which are the most appropriate for fulfilling their legitimate objectives.

Similarly, the SPS Agreement calls for national sanitary and phytosanitary measures which are based on international standards, although Members may introduce measures which result in higher levels of protection if there is a scientific justification12. A closely related concept is the concept of equivalence, which involves accepting the technical regulations or sanitary and phytosanitary measures of other Members as equivalent, if it is demonstrated that they adequately fulfil the objectives of the importing country’s regulations, or that they achieve the importing country’s appropriate level of protection13.

The concept of risk assessment is an environmental concept which is used in risk management and is relevant to the precautionary approach. It has been incorporated into the SPS Agreement as a means for determining the level of sanitary or phytosanitary protection which is appropriate for each country14. SPS Article 5 invites Members to ensure that their measures “are based on an assessment … of the risks to human, animal or plant life or health .. , taking into account, on the one hand, “available scientific evidence; relevant processes and production methods; relevant inspection, sampling and testing methods; prevalence of specific diseases or pests; existence of pest- or disease- free areas; relevant ecological and environmental conditions; and quarantine or other treatment”; and on the other hand relevant economic factors, such as “the potential damage in terms of loss of production or sales in the event of the entry, 7 establishment or spread of pest or disease; the costs of control or eradication in the territory of the importing Member; and the relative costeffectiveness of alternative approaches to limiting risks”. 2. What role does a decision tree play in business decision-making? Illustrate the choice between two investment projects with the help of a decision tree assuming hypothetical conditions about the states of nature, probability distribution, and corresponding pay-offs? Decision Trees: Alternatively, a decision analysis problem can be represented by a decision tree. A decision tree is a fully connected directed graph (a graph where direction matters) with no cycles (loops) and only one starting point, called the root.

It consists of nodes (or vertices) connected by branches (or edges) that represent the chronological sequence of events that constitute the problem of interest. There are two types of nodes: decision nodes, denoted by squares, and chance (or uncertainty) nodes, denoted by circles. Branches emanating from decision nodes represent action alternatives Ai, while those originating from chance nodes represent states of nature Sj. Payoffs Rij are placed at the terminal end of the branches, which are also called leaves. It is customary to place the probabilities pj under the corresponding state-of-nature branch, as shown below. The decision tree T = {A, S, R, P} also formally defines a decision analysis problem.

By convention, decision trees are drawn from left to right following the chronological sequence of events of the decision problem. Decision and chance nodes need not necessarily alternate: any type of node may be followed by a similar or different type of node; it all depends on the logic of the problem. Decision trees are the preferred form of representation. Decision matrices are more compact but their usefulness is largely limited to simple problems consisting of a single decision subject to only one uncertain event. When multiple decisions and/or chance events are involved, decision trees should be used. Influence diagrams are a third form of problem representation used in decision analysis.

However, since they conceal the model’s structural detail, special proprietary software is required to be able to use the diagrams effectively. They will therefore not be discussed in this Website. Nevertheless, keep in mind that for complex decision problems, especially those with multiple objectives and stakeholders, influence diagrams and the requisite software are extremely useful. These are the kinds of decision making in the face of great uncertainty that decision analysis is designed to address. Decision analysis provides a framework and methodology for rational decision making when the outcomes are uncertain. The preceding chapter describes how game theory also can be used for certain kinds of decision making in the face of uncertainty.

There are some similarities in the approaches used by game theory and decision analysis. However, there also are differences because they are designed for different kinds of applications. Before seeking a solution to the first Goferbroke Co. problem, we will formulate a general framework for decision making. In general terms, the decision maker must choose an action from a set of possible actions. The set contains all the feasible alternatives under consideration for how to proceed with the problem of concern. This choice of an action must be made in the face of uncertainty, because the outcome will be affected by random factors that are outside the control of the decision maker.

These random factors determine what situation will be found at the time that the action is executed. Each of these possible situations is referred to as a possible state of nature. For each combination of an action and a state of nature, the decision maker knows what the resulting payoff would be. 1. The decision maker needs to choose one of the alternative actions. 2. Nature then would choose one of the possible states of nature. 3. Each combination of an action and state of nature would result in a payoff, which is given as one of the entries in a payoff table. 4. This payoff table should be used to find an optimal action for the decision maker According to an appropriate criterion

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