Q1. Illustrate the following with supply and demand curves:
- With increased access to wireless technology and lighter weight, the demand for smart phones has increased substantially. Smart phones have also become easier and cheaper to produce as new technology has come online. Despite the shift of demand, prices have fallen.
- Sugar production in Pakistan totalled 5.2 million tons in 2019, a 36 percent increase from the 3.34 million tons produced in 2018. Demand increased by even more than supply, pushing 2019 prices to Rs. 63 per kg from Rs. 56 per kg in 2018.
- During the high-tech boom in the late 1990s, Sharah-e-Faisal office space was in very high demand and rents were very high. With the national recession that began in March 2001, however, the market for office space in Sharah-e-Faisal (Karachi) was hit very hard, with rents per square foot falling. In 2005, the employment numbers from Sharah-e-Faisal were rising slowly and rents began to rise again. Assume for simplicity that no new office space was built during the period.
Estimated Time: 20 Minutes 03 Marks
Q2. Do you agree or disagree with each of the following statements? Briefly explain your answers and illustrate each with supply and demand curves.
- The price of a good rises, causing the demand for another good to fall. Therefore, the two goods are substitutes.
- Two goods are complementary goods. Rise on the price of a good will result in decreased demand. As the demand decreases, the complementary goods demand will also decrease.
P1
P
Q1 Q
- A shift in supply causes the price of a good to fall. The shift must have been an increase in supply.
- That’s true. Only the rightward shift in supply curve or the increase in supply will cause the price to fall.
P
P1
S S1
- During 2019, incomes fell sharply for many Pakistanis. This change would likely lead to a decrease in the prices of both normal and inferior goods.
- No. As the incomes decrease, people are likely to shift from normal goods to inferior goods. That will cause the decrease in demand of normal goods and increase in the demand of inferior goods. But their prices will not change as primary cause of shifting of demand curve is not price
Normal goods Inferior goods
P P
D1 D D D1
- Two normal goods cannot be substitutes for each other.
- Wrong. Two normal goods can be substitutes for each other. People can switch from one normal goods to another if the price of one normal good increase.
- If demand increases and supply increases at the same time, price will clearly rise.
- Prices will not rise because both, supply and demand curves shift rightward.
D D1
S S1
P
- The price of good ‘A’ falls. This causes an increase in the price of good ‘B’. Therefore, goods A and B are complements.
- True. If the price of good “A” falls, quantity demanded will increase, causing the increase in quantity demanded of complementary good. This will increase the price of complementary good.
Estimated Time: 10 Minutes 02 Marks
Q3. The following sets of statements contain common errors. Identify and explain each error:
- Demand increases, causing prices to rise. Higher prices cause demand to fall. Therefore, prices fall back to their original levels.
- Increased demand will not cause prices to rise.
P
D D1
- The supply of chicken meat in Pakistan increases, causing meat prices to fall. Lower prices always mean that Pakistani households spend more on meat.
- Increased supply of chicken meat will not cause prices to lower down.
P
S S1
Estimated Time: 15 Minutes 04 Marks
Q4. For each of the following statements, draw a diagram that illustrates the likely effect on the market for eggs. Indicate in each case the impact on equilibrium price and equilibrium quantity.
- Dr. Adeeb Rizvi warns that high-cholesterol foods cause heart attacks.
- No effect on market of eggs.
- The price of bread, a complementary product, decreases.
BREAD EGGS
S
P
P
P1
D
Q Q1 Q Q1
- An increase in the price of chicken feed occurs.
CHICKEN FEED
S1
P1 P1 S
P P
Q1 Q Q1 Q
- Caesar salads become trendy at dinner parties. (The dressing is made with raw eggs.)
P
D D1
Estimated Time: 20 Minutes 3.5 Marks
Q5. (i). Fill in the missing amounts in the following table:
| % Change in Price | % Change in Quantity | Elasticity | |
| Demand for Walls Ice Cream | +10% | -12% | A |
| Demand for soft drinks in Stadium | -20% | B | -0.5 |
| Demand for Cineplex tickets | C | -15% | -1.0 |
| Supply of Chicken | +10% | D | +1.2 |
| Supply of Beef | -15% | -10% | E |
(ii) Use the table in the preceding problem to defend your answers to the following
questions:
- Would you recommend that Walls move forward with a plan to raise prices if the company’s only goal is to increase revenues?
- Would you recommend that soft drink stands cut prices to increase revenues at Stadium next year?
Estimated Time: 15 Minutes 02 Marks
Q6. (i) A sporting goods store has estimated the demand curve for a popular brand of running shoes as a function of price. Use the diagram to answer the questions that follow.
- Calculate demand elasticity using the midpoint formula between points A and B, between points C and D, and between points E and F.
- If the store currently charges a price of Rs.50, then increases that price to Rs.60, what happens to total revenue from shoe sales (calculate P X Q before and after the price change)? Repeat the exercise for initial prices being decreased to Rs.40 and Rs.20, respectively.
(ii) For each of the following scenarios, decide whether you agree or disagree and explain your answer.
- If the elasticity of demand for cocaine is -0.2 and the Anti-Narcotic Department succeeds in reducing supply substantially, causing the street price of the drug to rise by 50%, buyers will spend less on cocaine.
- Every year at Eid-ul-FitrBangle vendors bring tens of thousands of dozens of bangles from the Hyderabad to Karachi City. During the last two years, the market has been very competitive; as a result, price has fallen by 10 percent. If the price elasticity of demand was -1.3, vendors would lose revenues altogether as a result of the price decline.
Estimated Time: 20 Minutes 4 Marks
Q7. (i) Describe what will happen to total revenue in the following situations.
- Price decreases and demand is elastic.
- Price decreases and demand is inelastic.
- Price increases and demand is elastic.
- Price increases and demand is inelastic.
- Price increases and demand is unitary elastic.
- Price decreases and demand is perfectly inelastic.
- Price increases and demand is perfectly elastic.
(ii) The cross-price elasticity values for three sets of products are listed in the table below. What can you conclude about the relationships between each of these sets of products?
| Products A and B | Products C and D | Products E and F | |
| Cross-Price Elasticity | -8.7 | +5.5 | 0.0 |
Estimated Time: 15 Minutes 3.5 Marks
Q8. In Pakistan, there is only one sugar producer, a government owned monopoly called Pakistan Sugar. Suppose that the company were run in a way to maximize profit for the government. That is, assume that it behaved like a private profit-maximizing monopolist. Assuming demand and cost conditions are given on the following diagram, at what level would Pakistan Sugar target output and what price would it charge?
Now suppose Pakistan Sugar decided to begin competing in the highly competitive Indian market. Assume further that Pakistan maintains import barriers so that Indian producers cannot sell in Pakistan but that they are not immediately reciprocated. Assuming Pakistan Sugar can sell all that, it can produce in the Indian market at a price P = PIND indicate the following:
Estimated Time: 15 Minutes 03 Marks
Q9. The following diagram shows the structure of cost and demand facing a monopolistically competitive firm in the short run.
- Identify the following on the graph and calculate each one.
- Profit-maximizing output level
- Profit-maximizing price
- Total revenue
- Total cost
- Total profit or loss
- What is likely to happen in this industry in the long run?
Estimated Time: 15 Minutes 02 Marks
Q10. In the area around Iqra University, a number of food vendors gather each lunchtime to sell food to university students who are tired of Hostel food. The university and the city have no license fees that apply to food vendors, preferring to let the market dictate how many and which vendors show up.
Many different cuisines are represented on the street corner, including a cart sponsored by Tipu Burger sells a burger of either Chicken or Beef for Rs.100. The food is made in the morning at nearby restaurant in DHA, when the kitchen is otherwise unoccupied.
His crew of three, each of whom earns Rs.200 per hour, takes 2 hours to make the 50 meals required by Tipu. In creating these burgers, they use ingredients equal to Rs.2000. Tipu hires another worker to load her cart with food and sell it during the lunch hours. That worker costs Rs.100 per hour and typically sells out the entire cart of 50 meals in 2 hours. The cart is rented for Rs.1000 per 5-day week. (The carts are not in operation on the weekends, when Tipu is too busy at his restaurant.)
- What market structure does this business most resemble? What characteristics lead you to this conclusion?
- What would you expect to see happen in this business? Use the data in the problem to support your conclusions.