Muhammad Ihtisham (BSSE-B)
Muhammad Ihtisham (BSSE-B)
Q1. Demand for air tickets is given for business travelers and vacationers from Islamabad to Karachi
(2+3)
a. As the price of tickets rises from $200 to $250, whatis the price elasticity of demand for (i)
businesstravelers and (ii) vacationers? (Use the midpointmethod in your calculations.)
ANS. For business travelers, the price elasticity of demand when the price of tickets rises from $200 to
$250 is....
= 0.05/0.22 = 0.23.
For vacationers, the price elasticity of demand when the price of tickets rises from $200 to $250 is.... .
= 0.29/0.22 = 1.32.
ANS. The price elasticity of demand for vacationers is higher than the elasticity for business travelers
because vacationers can choose more easily a different mode of transportation. Business travelers are
less likely to do so because time is more important to them and their schedules are less adaptable.
Q2. Pharmaceutical drugs have an inelastic demand, and computers have an elastic demand. Suppose
thattechnological advance doubles the supply of bothproducts (that is, the quantity supplied at each
price istwice what it was). (2+2+2+2)
ANS. The increase in supply reduces the equilibrium price and increases the equilibrium quantity in both
markets:
ANS. Pharmaceutical drugs (with inelastic demand) experiences a larger change in price.
ANS. Because demand is inelastic in the market for pharmaceutical drugs, the percentage increase in
quantity will be lower than the percentage decrease in price; thus, total consumer spending will decline.
Because demand is elastic in the market for computers, the percentage increase in quantity will be
greater than the percentage decrease in price, so total consumer spending will increase.
Q3. Explain why the following might be true: A droughtaround the world raises the total revenue that
farmersreceive from the sale of grain, but a drought only in KPK reduces the total revenue KPK
farmersreceive. (3)
ANS. If there is a drought around the world supply curve shifts to the left and the demand being inelastic
raises the price of the grains. So due to increase in the price and inelastic demand curve there is an
increase for farmers around the world.
When there is drought in KPK only the farmers there don't have the expected produce, but that doesn't
affect the market as there are other farmers who can cater to the demand of the grains and doesn't lead
to a shift in supply curve. Thus the KPK farmers have to sell less produce at this same price and that
leads to decrease in their farm revenue.
a. What was the growth rate of nominal GDP between1996 and 1997? (Note: The growth rate is
thepercentage change from one period to the next.)
ANS. The growth rate of nominal GDP is ($8,111 - $7,662)/$7,662 ´ 100% = 5.9%.
b. What was the growth rate of the GDP deflatorbetween 1996 and 1997?
ANS. The growth rate of the deflator is (112 - 110)/110 ´ 100% = 1.8%.
e. What was the growth rate of real GDP between1996 and 1997?
ANS. The growth rate of real GDP is ($7,242 - $6,965)/$6,965 ´ 100% = 4.0%.
f. Was the growth rate of nominal GDP higher orlower than the growth rate of real GDP? Explain.
ANS. The growth rate of nominal GDP is higher than the growth rate of real GDP because of inflation.
Q5. Explain why an economy’s income must equal its expenditure? (5)
ANS. An economy's income must equal its expenditure, because every transaction has a buyer and a
seller. Thus, expenditure by buyers must equal income to sellers. This means that the money act as a
medium between buyer and selleer Everyone one dollar of spending becomes one dollar of someone's
income.
Q6. If the price of a Navy submarine rises, is the consumer price index or the GDP deflator affected
more? Why? (4)
ANS. If the price of a Navy submarine rises, there is no effect on the consumer price index, since Navy
submarines are not consumer goods. But the GDP price index is affected, since Navy submarines are
included in GDP as a part of government purchases.