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Economics and Management Decisions-UPES-2-J13

Economics and Management Decisions-UPES-2-J13

Section A (20 Marks)

Write short notes on any four of the following

  1. Market Equilibrium
  2. Transfer Pricing and Value Pricing
  3. Classification of Profits
  4. Conceptual Models
  5. Multi-Product Pricing

 

Section B (30 marks)

 

(Attempt any three)

                                                                                                                     

  1. Discuss the evaluation of perfect competition.
  2. The extent to which a seller can separate the market and discriminate between the buyers, gives rise to three types of price discrimination. Discuss the three types of price discrimination.
  3. Describe the concept of Linear Break-even analysis with the help of elaborated diagram.
  4. “In U.S. organization decisions are made by primarily by individuals and usually only a few people involved.” Explain this statement.

 

Section C (50 marks)

 

(Attempt all questions. Every question carries 10 marks)

 

Read the case “Oil and New Economy” and answer the following questions:

Case Study: Oil and New Economy

 

You cannot get more old economy than to fret about the price of oil. Although the oil price is hard to miss when you come to refuel your car, economy watchers with any sophistication are encouraged at every turn to pay little attention. For instance, measures of "underlying" inflation exclude the oil price - too volatile, the argument goes, and no longer all that significant, one is led to suppose. Yet theory and empirical evidence suggest that the price of oil remains a fundamental driver of the business cycle. In all likelihood cheap oil has played a big role in creating the appearance of a "new economy" and dear oil, if the price stays up, may do more harm than many believe.

In Britain, the leading advocate of the view that oil still matters has been Andrew Oswald, a professor at Warwick University. In an article in the Financial Times last year he went so far as to claim that the so-called new paradigm is almost entirely an illusion caused by a prolonged period of extremely cheap oil. Now that the price has soared and assuming that it stays relatively high, he fears that the result will be a marked slowdown in the world economy.

Mr. Oswald is therefore a doubly unusual fellow: an easy-money new-economy sceptic. Most new-economy skeptics want monetary policy in the United States tightened faster (because they believe the surge in labor productivity will not last and that inflationary pressures are building). Mr. Oswald, in contrast, though a trenchant critic of the new economy, believes that monetary policy should be on recession watch in both Britain and America.

Mr. Oswald, along with Alan Carruth of the University of Kent and Mark Hooker of the Federal Reserve, published an article in 1998 which helps to makes the case for this view. The starting point is the chart, which repays careful study. The association between changes in the price of oil and, after a delay, changes in American unemployment is impressively close. And the underlying model which Mr. Oswald and his collaborators adduce is persuasive and simple. They concentrate on the supply side (that is, labor-market) implications of oil, rather than on the demand side effects. Dear oil raises producers' costs and squeezes their profit margins. To restore those margins, employers strive to cut labor costs. At the aggregate level and for any given pressure of demand, higher unemployment is the result: in effect, only with more people on the dole are workers willing to accept lower wages. Mr. Oswald and his colleagues showed that a forecasting model based on this version of the "efficiency wage" theory of labor markets fits the data very well. From the late 1970s to the mid-1990s, oil played a stronger and statistically more significant role in driving American unemployment than interest rates. In forecast extending beyond the sample period used in the study, a stern test of any model, Mr Oswald's approach easily outperforms its rivals, including consensus predictions of commercial forecasters.

The paper makes no attempt to test and reject the view that new technologies have changed the structure of the American economy in the late 1990s. New economy optimists may therefore be untroubled by these findings. But that would be a mistake. Mr. Oswald's point is that there is no need to posit a new economy to account for the behavior of the American economy since the mid-1990s. The boom has all the standard features of an oil price shock, except that, compared with the more familiar cases of 1973-74 and 1979-80 and the not-so-noticed case of 1990-91, this one happened in reverse. Profit margins widened dramatically as the price of energy fell; inflationary pressure subsided even as demand gained strength (under the influence of rising stock market wealth and other forces); the rate of unemployment consistent with stable inflation (the so-called natural rate) appeared to fall to an amazing low.

Lawrence Summers, America's treasury secretary, attracted attention recently when he likened the new technology boom to a positive supply side shock, the converse of the oil price shocks of the 1970s. And yet, Mr. Oswald argues, the more natural parallel to draw between then and now is that for most of the 1990s there has been a "good" oil price shock. Even if you do not accept Mr. Oswald's new economy skepticism in full, it is undeniable that oil was (rightly) given most of the blame for what went wrong in those earlier periods, but none of the credit for what has gone right more recently.

It seems highly likely, Mr. Oswald's scepticism notwithstanding, that a surge of technological progress in America has indeed applied a significant positive supply shock to the economy. But it is certain, as opposed to merely likely, that the recent oil-price hike is a substantial negative supply shock. The future course of the economy will depend on which of these forces proves more powerful. If low inflation persists alongside very low unemployment, the new-economy shock can be declared the winner. But if, with oil pegged at more than, say, $ 20 a barrel, low inflation can be maintained only at the cost of rising unemployment, the oil price will have had its revenge. It was denied its full share of thanks for the current boom; it may be harder to ignore in any forthcoming recession.

 

Questions:

  1. Discuss the boom standard features of an oil price shock.
  2. What is the impact of oil price on international business and economy?
  3. Do you agree with Mr. Oswald? Give reasons.
  4. Analyze the cause-effect relationship between unemployment and oil price.
  5. Contrast the "demand side" and the "supply side" views on the case.
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