(b) What is cost-plus pricing ?Explain its limitations. QUESTION TWO (a)Managerial economics is the integration of economic theory with business practice for the purpose of facilitating decision making and forward planning. Explain the relevance of this statement to management. (12marks) (8marks) (c) Explain the determinants of costs of production incurred by firms. (5marks) (a) Given a demand function of the linear form: Q=1000-20p Calculate and interpret the point elasticity of demand when p=100 and Q=800 and discuss the importance of the concept of elasticity of demand to managers and government . (10marks) (b)Explain the concept the law of variable proportions and its reliance in management of a firm. (5marks) QUESTION THREE (a)Suppose you are a manager of a firm earning Ksh.250,000 per month and you decide to open your business. Your revenue during the first year of operations is 120,000 and expenses are as follows: Salaries Supplies 45,000 15,000 10,000 Utilities 1000 Interest on loan 10,000 Calculate: (i) Explicit and implicit costs. (4marks) (ii) Business and economic profit. (4marks) (iii) Would you advice the manager to run his business or employ Someone else to help him? (2marks) (b) Explain determinants of demand for a good or service. (5marks) (a) Giv) as T TC Determine poter pro (ii) Ma (b) Explain the iii) Pro QUESTION F Texas Fur line of ful from the R The own made to r Required

(b) Cost-plus pricing is a pricing strategy where the selling price of a product is determined by adding a markup percentage to the cost of production. The limitations of cost-plus pricing include:<br /><br />1. **Ignores Market Demand**: It does not consider consumer preferences or market demand, which can lead to overpricing or underpricing.<br />2. **No Competitive Edge**: It does not account for competitors' pricing strategies, which can result in a lack of competitiveness.<br />3. **Inflexibility**: It is difficult to adjust prices in response to changes in market conditions or consumer behavior.<br /><br />QUESTION TWO<br /><br />(a) Managerial economics is the integration of economic theory with business practice for the purpose of facilitating decision making and forward planning. This statement is relevant to management because it provides a framework for making informed decisions based on economic principles, helping managers understand market dynamics, optimize resource allocation, and develop effective strategies for achieving organizational goals.<br /><br />(c) The determinants of costs of production incurred by firms include:<br /><br />1. **Input Prices**: The cost of raw materials, labor, and other inputs.<br />2. **Technology**: The level of technology used in production affects efficiency and costs.<br />3. **Scale of Production**: Economies of scale can reduce costs as production increases.<br />4. **Labor Productivity**: The efficiency of labor in the production process.<br /><br />(a) Given the demand function \( Q = 1000 - 20p \), the point elasticity of demand when \( p = 100 \) and \( Q = 800 \) is calculated as follows:<br /><br />\[ E = \frac{dQ/dp \cdot p}{Q} = \frac{-20 \cdot 100}{800} = -2.5 \]<br /><br />The negative sign indicates that the demand is elastic, meaning a 1% increase in price leads to more than a 1% decrease in quantity demanded. This concept is important for managers and governments as it helps in setting prices and understanding the impact of price changes on consumer behavior.<br /><br />(b) The law of variable proportions states that as the quantity of one input variable is increased while other inputs are held constant, the marginal product of the variable input will eventually decrease. In management, this principle is crucial for optimizing the use of resources, understanding the limits of input substitution, and making informed decisions about production processes.<br /><br />QUESTION THREE<br /><br />(a) (i) Explicit costs are the direct, out-of-pocket expenses such as salaries, supplies, utilities, and interest on loan. Implicit costs are the opportunity costs of using resources owned by the firm, such as the manager's salary.<br /><br />(ii) Business profit is calculated as total revenue minus explicit costs, while economic profit also subtracts implicit costs. Given the provided figures, business profit would be \( 120,000 - (45,000 + 15,000 + 10,000 + 1,000 + 10,000) = 59,000 \). Economic profit would be \( 59,000 - 250,000 = -191,000 \).<br /><br />(iii) Based on the economic profit, it would not be advisable for the manager to run the business alone as it is incurring a loss.<br /><br />(b) Determinants of demand for a good or service include:<br /><br />1. **Price of the Good**: Higher prices typically reduce demand.<br />2. **Income Levels**: Higher income generally increases demand.<br />3. **Prices of Substitutes and Complements**: Changes in the prices of alternative goods can affect demand.<br />4. **Consumer Preferences and Tastes**: Shifts in preferences can increase or decrease demand.<br />5. **Expectations**: Future price expectations can influence current demand.<br /><br />QUESTION FOUR<br /><br />(a) (i) Total Cost (TC) is the sum of Fixed Costs (FC) and Variable Costs (VC). Given the provided figures, TC would be \( 250,000 + 45,000 + 15,000 + 10,000 + 1,000 + 10,000 = 331,000 \).<br /><br />(ii) Marginal Cost (MC) is the additional cost incurred by producing one more unit of output. It can be determined by the change in total cost divided by the change in quantity.<br /><br />(b) The concept of the law of variable proportions is crucial in management for optimizing the use of resources, understanding the limits of input substitution, and making informed decisions about production processes.<br /><br />QUESTION FIVE<br /><br />Texas Fur Company's line of full employment from the R