MANAGERIAL ECONOMICS CASE STUDY ANSWER PROVIDED WHATSAPP 91 9924764558

MANAGERIAL ECONOMICS CASE STUDY ANSWER PROVIDED WHATSAPP 91 9924764558

Case 1: Where is the Fair Play? (Marks-16)

In most countries in Europe, and primarily America, they don’t prefer the leg meat – it is waste matter

for them so they look for nations where they can dump this meat. They did in the Philippines, Sri Lanka

and Russia. They might deny it in the US but everybody knows that they are sitting on stocks for at

least 2-3 years. They have succeeded in doing that because of their good freezing techniques. Now it’s

becoming a major problem for them. They’re not used to eating leg meat and are in a fix. In the US

they actually load the price of the entire chicken on the breast meat, and the rest of the bird is like a

carcass to them. Due to environmental reasons they can’t dump it in the sea so they have to dump it

somewhere. It can be any underdeveloped country, may be India!

It’s wrong notion that supply of this meat to underdeveloped countries will be good for the consumers

there. It is not. Can the Americans guarantee anything – how long will they be able to supply the

chicken? How long will they supply subsidized eggs to such a large country? We could end up destroying

our industry base and that will be very sad. As far as chicken is concerned, they can only supply the

legs – they can never supply the whole bird. The white meat costs US $3 to 3.5 per pound, so it’s out of

range. May be the consumer gets the advantage of subsidized supply of the white meat in the short run

but over time the consumers’ interests are likely to suffer because such a supply will result only in

destroying the chicken and egg industry in India. Once their surplus stock gets exhausted they can

charge you any price – can they guarantee the price? They can’t and they won’t.

The chicken/egg business deals with livestock. It is not possible for people to stop producing for a year

and come back – they will be finished. Once they are out of the cycle they are out of the industry. It

would be very said if that happened to this industry that has grown over the past 25 years.

For many people it provides a day-to-day livelihood. Once the foreign players come in and are allowed

to sell their products at very low rates, the industry could collapse as it has in other countries.

India is a the cheapest egg producer in the world – about Re.1 a piece. But now we are very worried. In

European countries, eggs cost between Rs.3-5 but they are able to deliver the same egg to the Middle

East at Re 1-1.50. This is because in Western countries they have so many subsidies. When it comes to

agriculture, they are very sensitive and protective. If they bring it to the Middle East, then why can’t

they do it here as well? The government knows that the Western countries are not going to remove

subsidies – they know when it comes to agriculture, neither the Europeans nor the Americans are going

to do anything. They are going to protect them forever- so where is the fair play?

Questions:

i. What would you recommend to the government to create a level playing field for the local firms

and the western exporters of meat to India?

ii. Can you cite any other typical product where India’s advantage turns into disadvantages as a

result of WTO agreement?

Case: 2 (Marks -16)

One of the most notable things about consumer behaviour is that the demand in the short run is always

less elastic (or more inelastic) than the demand in the medium or long term. Petroleum, which is one of

the most essential commodities of modern life is a classic example of this phenomenon. Petroleum, also

known as a luxurious necessity because of its steep price, is the greatest cause for our Balance of

Payment being perennially in deficit. Despite all its disadvantages, life is literally and figuratively

`immobile’ without petroleum.

Our country faced two oil shocks during the 1970s. The shock of 1973-74 was a severe one and was felt

by many other countries, while the oil shock of 1979 was mild and pertained only to India. In order to

combat the sudden fall in supply, resulting in excess demand for it, the price of petrol was hiked (in

India, petroleum prices are always administered, and not market-driven) assuming that consumer

demand for petrol will go down. There was some reduction in the consumption of petrol as people

limited their pleasure trips and joy rides. The concept of `car pool’ to go to offices started and the

middle class started depending heavily on diesel-run public transport (diesel although a by-product of

crude oil is a cheaper and readily available product).

Besides this, there was no perceptible change in the demand for petrol and people continued to buy

petrol at a higher price. As a result, although the prices went up by 25 to 30 percent, the demand

decreased by only 5 to 6 percent between the 1970s and the early 1980s.

However, analysts and planners observed phenomenon, believed to be related to the hike in the price of

petrol. People, especially in the urban areas, started to stay near the workplace (even if it meant a

higher rent), showing a preference for fuel-efficient vehicles when compared to steady, stable but not

such fuel-efficient vehicles.

The phenomenal success of Maruti 800 cars launched in the mid-1980s was because of its single

attribute of fuel-efficiency, despite other disadvantages of a light body (which made it easy for the car to

topple over and get dented or damaged on Indian roads), costly parts (when compared to the

Ambassador or Fiat). Consumes preferred Maruti for its excellent fuel-efficient technology and hence a

lower running cost, than for any other reason. So much was the popularity of Maruti cars that

automobile associations discovered that the demand for other vehicles had falled by 30 to 40 percent in

favour of Maruti 800. a permanent change in the demand pattern for small, fuel-efficient cars had been

achieved.

For most commodities, economists found that in the long term (the concept of long term varies from

commodity to commodity) the absolute value of the demand elasticity is higher than in the short run. A

few of these are given in the following Table:

The value of demand elasticity for certain goods and services in India

(This includes urban, semi-urban and small town area)

Goods + Services Short-Run

Demand Elasticity

Long-Run

Demand

Elasticity

Expenditure on food 0.35 0.36

Expenditure on clothing 0.68 1.22

Consumption of electricity 0.54 0.90

House rent 0.75 1.82

Transportation 0.40 1.60

Source: Calculated on the basis of Government of India published reports.

Questions:

i Why do you think the absolute value of demand elasticity is less in the short run than in the long

run?

ii. Do you think jewellery as a commodity, can also be categorized in the same group as others in

the given table? In other words, will it also exhibit change in the demand elasticity between the

short and long run? Explain why?

iii. The change in the value of demand elasticity between short and long run is much smaller in case

of food than in clothing, what does this reflect about the consumer behaviour?

Case :3 (Marks -16)

TAKE THE BULL BY THE HORN

Through its relatively brief history, the Reliance group has specialised in taking gambles, sometimes

huge ones. A pattern repeated time and again - such as when it set up capacities for Polyester Staple

Fibre (PSF) which was the same size as the domestic market or when it put up a 27 million tonne

refinery in Jamnagar, which is close to a third of India's demand for petroleum products.

There's no gamble quite so audacious as the one that's underway. The Rs. 25,000 crore Reliance

Infocom project that's currently taking shape aims at no less than a complete remake of India's telecom

landscape to emerge as India's number one telecommunications company, ahead of the state-owned

behemoth Bharat Sanchar Nigam l td.

It's also an attempt to realign Reliance's revenues and profits - which today originate entirely from

manufacturing - with India's economic profile, in which services account for over 40 per cent of GDP.

"Reliance's revenues will have to become diversified with a larger proportion originating from services

which would be in keeping with the

changing structure of India's economy," says Mukesh Ambani, vice chairman of Reliance Industries.

Rs. 8000 crore will be invested over a three - year period. As of now, it's full steam ahead for Reliance's

Infocom plans. As it had done earlier in oil and gas. Reliance plans to emerge as an integrated player,

focusing on the entire range of telecom services ranging from high - speed internet access for business

and consumers, call centres,

data centres, cellular phone services and domestic and international long distance telephony. Apart from

the gamut of telecom services, Reliance's integration plans are in one respect unique in the telecom

industry. If senior group officials are to be believed, the company has plans to assemble cellular phones

and set-top boxes.

At the core of the Infocom project is a 115,000 km fibre optic backbone covering 115 cities across 12

States, accounting for over 50 per of India's GDP. The company plans to become what the industry

jargon refers to as a carriers' carrier, where it hires out infrastructure to other telecom operations. Here

Reliance, along with the Bharti group, has obtained a licence for providing domestic long-distance

services. In fact, these are the only two companies to do so. The total domestic long-distance market is

worth Rs. 6,000 crore. Of this, the market available to the long

distance operator is likely to be Rs. 2,400 crore, according to a December 2000 Merrill Lynch report. This

is based on a 30 : 40 : 30 revenue share between the originator, the carrier and the last-mile access

provider. However, Reliance would hope for a larger share since it plans to fill all the three roles. Merrill

Lynch estimates that the domestic long-distance revenues accruing to the carrier would amount to Rs.

2760 crore in 2002 - 03, of which Reliance is expected to garner 20 per cent - or Rs. 620 crore.

As part of its plans to enter international long-distance telecommunication, Reliance has already

submitted an expression of interest for international long-distance operator VSNL. The total international

long-distance market in India right now is Rs. 4,900 crore. Reliance's own estimates for revenue and

profitability have not been made publicly available. However, internal estimates reportedly project

revenues of Rs. 30,000 crore, which is roughly a third of the total telecommunication market of around

Rs. 1,00,000 crore estimated for fiscal year 2004 - 05. The annual total telecommunications market is

around Rs. 42,000 crore. These estimates are of course based on the assumptions of a rapid take-off in

traffic, particularly data traffic. Check out some figures: out of the 30 million households that have an

income over Rs. 4000, an estimated 20 million are in the urban market and 10 million in the rural

market. Out of the urban people, 13 million already have fixed-line connections. And out of the 10

million rural customers, 6.5 million already have fixed lines.

In the light of the above: "what kind of growth can one really expect" for the telecommunication sector

in India as such and Reliance lnfocom in particular ?

Questions :

(a) Is there such a market in India for all the huge plans that they have ?

(b) Can you support it as a case of economies of scope ?

(c) Does it not lend to monopolistic conditions ? Give reasons.

Case : 4 (Marks-16)

The Industry

The automotive sector is one of the core industries of the Indian economy, whose prospect is reflective

of the economic resilience of the country. The automobile industry witnessed a growth of 19.35 percent

in April-July 2006 when compared to April-July 2005. As per Davos Report 2006, Indian is largest three

wheeler market in the world; 2nd largest two wheeler market; 4th largest tractor market; 5th largest

commercial vehicle market and 11th largest passenger car market in the world and expected to the

seventh largest by 2016. India is among few countries that are showing a growth rate of 30 per cent in

demand for passenger cars. The industry currently accounts for nearly 4% of the GNP and 17% of the

indirect tax revenue. The well developed India automotive industry produces a wide variety of vehicles

including passenger cars, light, medium and heavy commercial vehicles, multi-utility vehicles, scooters,

motorcycles, mopeds, three wheelers, tractors etc. Economic liberalization over the years made India as

one of the prime business destination for many global automotive players, including international giants

like Ford, Toyota, GM and Hyundai have also made their also made their presence with a mark.

As per another report, every commercial vehicle manufacture, create 13.31jobs, while every

passenger car creates 5.31 jobs, and every two-wheeler create 0.49 jobs, in the country. Beside, the

automobile industry has as output multiplier of 2.24, i.e., for every additional rupee of output in the auto

industry, the overall output of the India economy increases by Rs. 2.24.

The India automotive sector has a presence across all vehicle segments and key components. In

terms of volume, two wheelers dominate the sector, with nearly 80 percent share, followed by passenger

vehicles with 13 percent. At present, there are 12 manufactures of passenger cars, 5 manufactures of

multi utility vehicles (MUVs), 9 manufactures of commercial vehicles (CVs), 12 of two wheelers and 4 of

three wheelers, besides 5 manufactures of engines.

Table 1 Vehicle Segment-wise Market Share (2005-06)

Items Percent Share

Commercial Vehicles

Passenger Vehicles

Two Wheelers

Three Wheelers

Total

3.94

12.83

79.19

4.04

100.00

Source: Report of Society of Indian Automobile Manufactures (SIAM), 2006.

Although the automotive industry in India is nearly six decades old, until 1982, there were only three

manufactures – M/s. Hindustan Motors, M/s. Premier Automobiles and M/s. Standard Motors in the

motorcar sector. In 1982, Maruti Udyog Ltd. (MUL) came up as a government initiative in collaboration

with Suzuki of Japan to establish volume production of contemporary models.

The Company

Maruti Udyog Limited (MUL) has become Suzuki Motor Corporation’s R&D hub for Asia outside Japan.

Maruti introduced upgraded versions of the Esteem, Maruti 800 and Omni, completely designed and style

in house. This followed the up gradation of WagonR and Zen models, done in house only a year before.

Maruti engineer also worked with their counterparts in Suzuki Motor Corporation in the design and

development of its new model, Swift.

The company launched superior Bharat Stage III version of most of its models, well before the

Government deadline. Maruti also set up a Center for Excellence with a corpus of Rs. 100 million. This

was done in collaboration with suppliers, who contributed an additional Rs. 50 million. The Center

provides consultancy and training support to Maruti’s Suppliers and Sales Network to enable them to

achieve standards in Quality, Cost, Service and Technology Orientation.

Maruti has embarked upon this new project in collaboration with SMC for the manufacture of diesel

engines, petrol engines and transmission assemblies for four wheeled vehicles. The project is being

implemented in the existing Joint Venture Company viz. Suzuki Metal India Limited (renamed Suzuki

Power train India Limited).

Questions:-

1. Identify the most important factors of production in case of automobile industry. Also attempt to

explain the relative significance of each of these factors.

2. What more information would you like to obtain in order to draw a production function for Maruti

Udyog? Explain with logic.

3. Automobile industry is a good example of capital augmenting technical progress. Discuss.

Case :5 (Marks-16)

By almost any measure, David Galbenski’s company Contract Counsel was a success. It was a company

Galbenski and a law school buddy, Mark Adams, started in 1993; it helps companies find lawyers on a

temporary contact basis. The growth over the past five years has been furious. Revenue went from less

than $200,000 to some $6,5 million at the end of 2003, and the company was placing thousands of

lawyers a year.

And then revenue growth began to flatten; the company grew just 8% in 2004 despite a robust

market for legal services estimated at about $250 billion in the United States alone. Frustrated and

concerned, Galbenski stepped back and began taking a hard look at his business. Could he get it back on

the fast track? “Most business books say that the hardest threshold to cross is that $10 million sales

mark,” he says. “I knew we couldn’t afford to grow only 10% a year. We needed to blow right through

that number.”

For that a happen, Galbenski knew he has to expand his customer base beyond the Midwest into

large legal supermarkets such as Boston, New York, and Washington, D.C. He also knew that in doing so,

he would run into stiff competition from large publicly traded rivals. Contract Counsel’s edge had always

been its low prices. Clients called when dealing with large-scale litigation or complicated merger and

acquisition deals, either of which can require as many 100 lawyers to manage the discovery process and

the piles of documents associated with it. Contract Counsel’s temps cost about $75 an hour, roughly half

of what a law firm would charge, which allowed the company to be competitive despite its relatively

small size. Galbenski was counting on using the same strategy as he expanded into new cities. But would

that be enough to spur the hyper growth that he craved for?

At the time, Galbenski had been reading quite a bit about the growing use of offshore employees.

He knew companies like General Electric, Microsoft and Cisco were saving bundles by setting up call and

data centers in India. Could law firms offshore their work? Galbenski’s mind raced with possibilities. He

imagined tapping into an army of discount-priced legal minds that would mesh with his existing talent

pool in the U.S. The two work forces could collaborate over the Web and be productive on a 24-7 basis.

And the cost saving could be massive.

Using offshore workers was a risk, but the payoff was potentially huge. Incidentally Galbenski and

his eight-person management team were preparing to meet for their semiannual strategic review

meeting. The purpose of the two-day event was to decide the company’s goals for the coming year.

Driving to the meeting, Galbenski struggled to figure out exactly what he was going to say. He was sill

undecided about whether to pursue an incremental and conservation national expansion or take a big

gamble on overseas contractors.

The Decision

The next morning Galbenski kicked off the management meeting. Galbenski laid out the facts as he saw

them. Rather than look at just the next five years of growth, look at the next 20, he said. He cited a

Forrester Research prediction that some 79,000 legal jobs, totaling $5.8 billion in wages, would be dent

offshore by 2015. He challenged his team to be pioneers in creating a new industry, rather than

stragglers racing to catch up. His team applauded. Returning to the office after the meeting, Galbenski

announced the change in strategy to his 20 full-timers.

Then he and his team began plotting a global action plan. The first step was to hire a company

out of Indianapolis, Analysts International, to start compiling a list of the best legal services providers in

countries where people had comparatively strong English skills. The next phase was vetting the

companies in person. In February 2005, just three months after the meeting in Port Huron, Galbenski

found himself jetting off on a three-month trip to scout potential contractors in India, Dubai, and Sri

Lanka. Traveling to cities like Bangalore, Chennai, and Hyderabad, he interviewed executive from more

than a dozen companies, investigating their day-to-say operation firsthand.

India seemed like the best bet. With more than 500 law schools and about 200,000 law students

graduating each year, it had no shortage of attorneys. What amazed Galbenski, however, was that

thanks to the Web, lawyers in India had access to the same research tools and case summaries as any

associate in the U.S. Sure they didn’t speak American English. “But they were also eager to tackle the

kinds of tasks that most new associates at law firms look down upon” such as poring over perfect for the

kind of document-review work he had in mind.

After a retune visit to India in August 2005, Galbenski signed a contract with two legal service

companies: QuisLex, in Hyderabad, and Manthan Services, in Bangalore. Using their lawyers and

Paralegals, Galbenski figured he could cut his document-review rates to $50 an hours. He also

outsourced the maintenance of the database used to store the contact information for his thousands of

contractors. In all, he spent about 12 months and $250,000 readying his newly global company.

Convincing U.S. based clients to take a chance on the new service hasn’t been easy. In November,

Galbenski lined up pilot programs with four clients (none of which are ready to publicise their use of

offshore resources). To help get the word out, he launched a website (offshore-legal-services.com),

which includes a cache of white papers and case studies to serve as a resource guide for companies

interested in outsourcing.

Questions:-

1. As money costs will decrease due to decision to outsource human resource, some real costs and

opportunity cost may surface. What could these be?

2. Elaborate the external and internal economies of scale as occurring to Contract Counsel.

3. Can you see some possibility of economies of scope from the information given in the case?

Discuss.