Question 1: Define the difference between following terms :
a. Microeconomics versus Macroeconomics
b. Normative statements versus positive statements
c. Change in Supply versus change in quantity supplied
d. Law of Demand versus law of supply e. Determinants of Demand versus determinants of Supply
f. Opportunity cost versus Marginal cost
g. Price Elasticity of Demand versus Cross-Price Elasticity of Demand.
h. Perfect competition versus competitive markets
i. Invisible hand theory versus price controls
j. 'Free lunch' versus 'there's no such thing as free lunch'
k. 'How people make decisions' versus 'How people interact
Question 2: Define and draw a circular-flow diagram. Identify the parts of the model that correspond to the flow of goods and services and the flow of dollars for each of the following activities:
a. Bilal pays a storekeeper Rs 200 for tea bags.
b. Amna earns Rs 1000 per hour working at a hotel.
c. Asad spends Rs 300 to get a haircut.
d. Maria earns Rs 10,000 from her 10 percent ownership of OneIndustrial.
Question 3: Suppose demand schedule is as follows: Price (Rs) 7 9 11 13 15 Quantity Demanded (income is Rs19,000) 40 35 25 15 10 Quantity Demanded (income is Rs23,000) 45 40 30 20 15
a. Use the midpoint method to calculate your price elasticity of demand as the price of chicken increases from Rs7 to Rs9 if
(i) income is Rs19,000 and
(ii) income is Rs23,000.
b. Calculate income elasticity of demand as income increases from Rs19,000 to Rs23,000 if
(i) the price is Rs11 and
(ii) the price is Rs15.
Question 4: Using supply-and-demand diagrams, show the initial effects of the following events on the market for sweatshirts. Clearly label the change in equilibrium, price and quantity.
a. A hurricane damages the cotton crop.
b. The price of leather jackets falls.
c. All colleges require morning exercise in appropriate attire.
d. New knitting machines are invented.
Question 5:
a. Define a production possibilities frontier?
Use an example to explain the assumptions of the economic model.
Support your answer with graphical representation of PPF and label efficient and inefficient points.
b. If cost of one product increases what will be the effect on PPF?
c. What is the concept of "comparative advantage"?
Question 6:
a. What are price controls? Name and define the two.
b. Which control will be effective in (i) Rental markets and (ii) Labor markets.
c. In the above two cases when are the price controls 'not' binding versus when these are binding?
d. Suppose demand and supply schedules are as follows: Price (In Rs per pack) 2 4 6 8 10 12 Quantity Demanded 12 10 8 6 4 2 Quantity Supplied 2 4 6 8 10 12 Using the demand and supply model, plot the data and demonstrate how price controls affect market outcomes : i. What are the equilibrium price and quantity? ii. Government impose a price floor Rs=3 above the equilibrium price. What is the new market price? How many packs are sold? iii. Government impose a price ceiling Rs=1 below the former price floor. What is the new market price? How many packs are sold? iv. Given your calculations and graphs above, when do you observe conditions of surplus and/or shortage? Is there allocative efficiency?