Mid-Term Exam (Take-Home) Fall - 2020 Subject: Microeconomics Saturday Submission Day: Sunday Instructor: Dr. Syed Tehseen Jawaid Submission Date: 29th November, 2020 Mr. Faraz Ur Rehman Mr. Yasin Turabi Syed Afaque Hussain Program: BBA Max. Marks: 25 Department of Business Administration Please follow the instructions carefully: 1. Write your answers in a Word file and upload the file before the due date on BlackBoard. 2. Write your name and registration ID on the first page of your Word file. 3. Answer scripts can be uploaded on BlackBoard any time before its deadline. Therefore, do not wait for the last hour to avoid any unforeseen problems. 4. Submission of answer copy(ies) will be considered acceptable through BlackBoard only. Therefore, do not submit your document through email or any other medium. 5. Use 12 pt. font size and Times New Roman font style along with 1-inch page margins. 6. Follow the requirements of the word limit and the marking criteria while writing your answers. 7. Provide relevant, original and conceptual answers, as this exam aims to test your ability to examine, explain, modify or develop concepts discussed in class. 8. Do not copy answers from the internet or other sources. The plagiarism of your answers may be checked through Turnitin. 9. Recheck your answers before the submission on BlackBoard to correct any content or language related errors. 10. Double check your word file before uploading it on BlackBoard to ensure that you have uploaded the correct file with your answers. Question 1 Maximum Marks: 05 a) What are the factors you consider to figure out the opportunity cost of a vacation to Gorakh Hill Station? (1 Marks) (Word count: 100 words max.) b) Efficiency and equality are examples of classic trade-offs in economics. Analyze each of the following statements from the standpoints of efficiency and equality. i. “Amid COVID-19, everyone in society should be guaranteed the best healthcare possible.” (2 Marks) (Word count: 150 words max.) ii. “When workers lose their jobs, they should be able to collect Ehsas income support benefits until they find a new job.” (2 Marks) (Word count: 150 words max.) Question 2 Maximum Marks: 06 a) Draw hypothetical consumer’s indifference curves for Soft-drink and Pizza. Describe and explain four properties of these indifference curves. (2 Marks) (Word count: 250 words max.) b) A student living in a university hostel has two options for meals: eating at the dining hall for Rs.600 per meal, or eating a meal at Dhaaba for Rs.150 per meal. His weekly food budget is Rs.6000. i. Draw the budget constraint showing the trade-off between dining-hall meals and meals at Dhaaba. Assuming that he spends equal amounts on both goods, draw an indifference curve showing the optimum choice. Label the optimum as point A. (1 Mark) ii. Suppose the price of a Dhaaba meal now rises to Rs.200. Using your diagram from part (a), show the consequences of this change in price. Assume that our student now spends only 30 percent of his income on dining-hall meals. Label the new optimum as point B. (1 Mark) iii. What happened to the quantity of meals at Dhaaba consumed as a result of this price change? What does this result say about the income and substitution effects? Explain. (1 Mark) iv. Use points A and B to draw a demand curve for meals at Dhaaba. What is this type of good called? (1 Mark) Question 3 Maximum Marks: 04 a) A change in consumer’s expectations causes a movement along the demand curve or a shift in the demand curve? Explain. A change in price of the goods results in a movement along the demand curve or a shift in the demand curve? Explain (2.5 Marks) (Word count: 250 words max.) b) A demand schedule for a normal good is as follows: Price Quantity demanded Rs.230 70 210 90 190 110 170 130 i. Do you think that the increase in quantity demanded (say, from 90 to 110 in the table) when price decreases (from Rs.210 toRs.190) is due to a rise in consumers’ income? Explain clearly (and briefly) why or why not. (1 Mark) ii. Now suppose that the good is an inferior good. Would the demand schedule still be valid for an inferior good? (0.5 Marks) Question 4 Maximum Marks: 06 a) What can be said about the price elasticity of demand in each of the following statements? i. “The Tikka delivery business in this town is very competitive. I’d lose half my customers if I raised the price by as little as 10%.”(1 Mark) ii. “My economics professor has chosen to use the Mankiw textbook for this class. I have no choice but to buy this book.” (1 Mark) iii. “I always spend a total of exactly Rs.1000 per week on coffee.” (1 Mark) b) A news website reported (Feb. 17, 2020) that ridership of Karachi Metro Bus declined after a fare increase: “There were nearly four million fewer riders in December 2019, the first full month after the price of a token increased Rs. 25 to Rs.150, than in the previous December, a 4.3 percent decline.” i. Use these data to estimate the price elasticity of demand for Karachi Metro Bus. (2 Marks) ii. According to your estimate, what happens to the Karachi Metro Bus’s revenue when the fare rises? (0.5 Marks) iii. Why might your estimate of the elasticity be unreliable? (0.5 Marks Question 5 Maximum Marks: 04 Income elasticity of demand measures the responsiveness of demand to changes in income. Explain what is happening to demand and what kind of good is being represented in the following situations. a) Income is rising, and income elasticity of demand is positive. (1 Mark) b) Income is rising, and income elasticity of demand is negative. (1 Mark) c) Income is falling, and income elasticity of demand is positive. (1 Mark) d) Income is falling, and income elasticity of demand is negative. (1 Mark)