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Muhammad Ihtisham (BSSE-B)

This document contains the details of an economics exam for a student named Muhammad Ihtisham studying BSSE (A&B) class. The exam covers principles of economics and has 6 multiple part questions related to topics like demand elasticity, market equilibrium with supply changes, effects of drought on farmer revenue, GDP growth rates, why an economy's income must equal its expenditure, and the impact of price changes on consumer price index vs GDP deflator.

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0% found this document useful (0 votes)
50 views4 pages

Muhammad Ihtisham (BSSE-B)

This document contains the details of an economics exam for a student named Muhammad Ihtisham studying BSSE (A&B) class. The exam covers principles of economics and has 6 multiple part questions related to topics like demand elasticity, market equilibrium with supply changes, effects of drought on farmer revenue, GDP growth rates, why an economy's income must equal its expenditure, and the impact of price changes on consumer price index vs GDP deflator.

Uploaded by

Ehtisham Khattak
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Name: Muhammad Ihtisham(BSSE-B)

Class: BSSE (A&B)

Subject: Principles of Economics

Exam: final term Exam

Duration: 2.5 hours (12:00 noon to 2:30 Evening, 19 August 2020)

Q1. Demand for air tickets is given for business travelers and vacationers from Islamabad to Karachi
(2+3)

QUANTITY DEMANDED QUANTITY DEMANDED


PRICE (BUSINESS TRAVELERS) (VACATIONERS)
$150 2,100 1,000

200 2,000 800

250 1,900 600

300 1,800 400

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....

[(2,000 – 1,900)/1,950]/[(250 – 200)/225]

= 0.05/0.22 = 0.23.

For vacationers, the price elasticity of demand when the price of tickets rises from $200 to $250 is.... .

[(800 – 600)/700] / [(250 – 200)/225]

= 0.29/0.22 = 1.32.

b. Why might vacationers have a different elasticitythan business travelers?

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)

a. What happens to the equilibrium price andquantity in each market?

ANS. The increase in supply reduces the equilibrium price and increases the equilibrium quantity in both
markets:

As the diagram below shows.

b. Which product experiences a larger change inprice?

ANS. Pharmaceutical drugs (with inelastic demand) experiences a larger change in price.

c. Which product experiences a larger change inquantity?

ANS. Computers (with elastic demand) experiences a larger change in quantity.

d. What happens to total consumer spending on eachproduct?

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.

Q4. . Consider the following data on U.S. GDP: (5)

NOMINAL GDP GDP DEFLATOR


YEAR (IN BILLIONS) (BASEYEAR 1992)

1996 7,662 110

1997 8,111 112

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%.

c. What was real GDP in 1996 measured in 1992prices?

ANS. Real GDP in 1996 (in 1992 dollars) is $7,662/(110/100) = $6,965.

d. What was real GDP in 1997 measured in 1992prices?

ANS. Real GDP in 1997 (in 1992 dollars) is $8,111/(112/100) = $7,242.

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.

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