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CA Foundation · Business Economics · Nature and Scope of Business Economics

A firm has ₹60 lakh to allocate between two divisions. At the present allocation, the marginal return per rupee is 0.30 in Division A and 0.18 in Division B. According to the equi-marginal principle, the firm should:

The firm should shift funds from Division B to Division A until marginal returns are equal. Division A gives a higher marginal return per rupee, so reallocating raises total returns. The equi-marginal principle requires equal marginal returns across all uses for the best allocation.

  1. AShift funds from Division B to Division A until marginal returns are equalisedCorrect
  2. BShift funds from Division A to Division B until marginal returns are equalised
  3. CKeep the allocation unchanged because both divisions are profitable
  4. DAllocate all funds to Division B because its average cost is lower

Explanation

Total return is maximised when the marginal return per rupee is equal across uses. Division A yields more per extra rupee, so moving funds from B to A raises total return until diminishing returns equalise the marginals. Shifting to B does the opposite and lowers total return.

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