Test: Business Economics - UGC NET MCQ

- The Assertion is correct because a focus on short-term results can undermine a company’s ability to invest in critical areas that foster long-term growth.

- The Reason is also correct as it accurately describes how shareholder pressure can lead to such short-term decision-making.

- The Reason is the correct explanation of the Assertion, as it provides the rationale behind why short-termism can harm long-term sustainability.

- The Assertion is true because when managers prioritize personal goals over shareholder value, it can lead to poor investment choices and misallocation of resources, ultimately harming the company’s performance.

- The Reason is also true; shareholders indeed have limited control over day-to-day decisions made by managers, which enables managers to act in ways that may not benefit the shareholders.

- The Reason serves as a correct explanation for the Assertion, as the lack of shareholder influence directly contributes to the conflicts that lead to inefficiencies.

When a firm produces at a level where Marginal Cost (MC) exceeds Marginal Revenue (MR), it indicates that the cost of producing an additional unit is greater than the revenue earned from selling that unit, leading to a loss on that unit. In such a scenario, the firm should reduce production to improve overall profitability. Understanding this relationship is crucial for firms to make informed production decisions that align with their economic goals. An interesting fact is that many firms use these principles not just for pricing and production decisions, but also to evaluate the efficiency of their operations and to strategize for future market changes.

Supermarkets often implement discounts on bulk purchases as a strategy to attract more customers. This approach not only encourages larger purchases but also ensures that the marginal revenue remains positive, as the increased volume of sales compensates for the lower price per unit. An interesting fact is that this tactic not only boosts revenue but also helps in managing inventory more efficiently by moving larger quantities of stock.

Both statements are correct. Tesla is known for its commitment to electric vehicle innovation, often sacrificing immediate profits for the sake of future growth and sustainability in the electric vehicle market. On the other hand, Patagonia has built its brand around strong ethical values, including environmental stewardship and fair labor practices, which it believes can coexist with profitability. Therefore, the correct answer is C: Both 1 and 2.

- The Assertion is true because the separation of ownership and control can lead managers to prioritize immediate financial performance, which might not align with the long-term interests of shareholders.

- The Reason is also true since managers often have incentives linked to short-term performance metrics, which can result in decisions that favor their bonuses instead of sustainable company growth.

- Moreover, the Reason correctly explains the Assertion, as it highlights the incentive misalignment that arises from this separation.

Statement 1 is correct because it highlights the importance of survival in competitive markets, emphasizing strategies like cost-cutting and market adaptation.

Statement 2 is incorrect as it suggests that profit maximization is the sole objective of a firm, disregarding other important goals such as employee well-being, environmental sustainability, and quality enhancement.

Therefore, the only correct statement is Statement 1, making Option A the correct answer.

- Assertion Evaluation: The assertion is correct as it accurately reflects the typical behavior of shareholders who aim for quick returns through dividends and stock price increases.

- Reason Evaluation: The reason is also correct as managers do tend to focus on long-term objectives, which can create a divergence between their goals and those of shareholders.

- Explanation of Relationship: The reason provides a contextual backdrop for the assertion, explaining why shareholders may seek immediate profits, making it the correct explanation of the assertion.

Firms maximize their profits when Marginal Cost (MC) equals Marginal Revenue (MR). At this point, the cost of producing one additional unit is exactly balanced by the revenue generated from selling that unit. If MC is less than MR, producing more units would increase profits, while if MC is greater than MR, it would indicate a loss on additional production. This principle is foundational in economics and helps firms determine optimal production levels. Interestingly, this relationship is also used in various fields, including pricing strategies and resource allocation.

Airlines often adjust their ticket prices based on demand, particularly during peak seasons. By raising prices, they can align their pricing with the higher marginal revenue generated from increased demand. This strategy allows airlines to cover their higher operational costs during busy travel times. Interestingly, this dynamic pricing model is prevalent across various industries and is a key factor in maximizing revenue.