Airport Campus

Student’s Name &

ID:
Managerial
Subject: Economics Submission Day: Sunday
Instructor: Asif Z. Warsi Submission Date: 14th of June, 2020
Program: MBA Submission Time: 06:00 PM (Before)
Section: Saturday - 1087 Max. marks: 30

Department of Business Administration

Final Exam (Take Home) – Spring 2020

Instructions:

1. Read and attempt all the questions carefully.

2. Organize your work clearly, neatly, and legibly with page numbers in footer.
3. Write answer to each of the questions in not more than 300 words.
4. You are not allowed to change the sequence of questions or any part.
5. You are allowed to draw graphs in plane paper and insert a scan copy.
6. This exam will test your ability to examine, explain, modify or develop concepts
discussed in class.
7. Exam answers will also be checked through Turnitin for originality.
8. Do not share your answer with any classmate or member. Otherwise, you will be
penalized by deduction in your marks.
9. The total marks for the final exam are 30 marks.
10. We have extended the duration of the exam to give you time to download the paper,
write your answers and upload them.
11. Each student has to submit complete question paper with answers on a Word
Document and submit the soft copy through VLE.
12. Your answer should be typed, single-spaced on standard-sized paper, with 1″ Normal
margins for all sides.
13. You should use a clear font that is highly readable; 12 pt. Times New Roman font.

_________________
Instructor's Signature
Estimated Time: 30 Minutes 05 Marks

Q-1: The following table represents the market for disposable Mask.

PRICE QUANTITY QUANTITY

DEMANDED SUPPLIED

Rs. 5.00 15 0
Rs.10.00 13 3
Rs.15.00 11 6
Rs.20.00 9 9
Rs.25.00 7 12
Rs.30.00 5 15
Rs.35.00 3 18

a) Plot this data on a supply and demand graph and identify the equilibrium price and
quantity.

b) Explain what would happen if the market price is set at Rs.30, and show this on the
graph.

c) Explain what would happen if the market price is set at Rs.15, and show this on the
graph.

Answer 1:

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b) Answer:
If the market price is set at Rs.30 where quantity demanded is 5 and quantity
supplied is 15, there is surplus of 10 units. The graph of disposable mask shows a surplus above
the equilibrium point. It means at price 30 there is surplus of 10 units.

c) Answer:
If the market price is set at Rs.15 where quantity demanded is 11 and quantity
supplied is 6, there is shortage of 5 units. The graph of disposable mask shows a shortage
of 5 units below the equilibrium point. This means at price Rs.15 there is shortage of 5
units.

Graph is given below:

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Estimated Time: 30 Minutes 05 Marks

Q-2: 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.

a) Calculate demand elasticity using the midpoint formula between points A and B, between
points C and D, and between points E and F.

b) 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)?

c) If the store currently charges a price of Rs.40, then decreases that price to Rs.20, what
happens to total revenue from shoe sales (calculate P X Q before and after the price
change)?

Answer 2:

a) Answer: Demand Elasticity using Mid-point formula between point A & B:

Formula for demand elasticity is calculated as:
(Q2−Q1 )
×100
(Q 2+Q 1)/2
(P 2−P 1 )
×100
( P 2+P 1)/2

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 (200−100 )
X 100
(200+100 /2
(60−50 )
X 100
= (60+50 )/2

= 66.67% = - 3.66 Answer.

18.18%

Demand Elasticity using Mid-point formula between point C & D:

(Q2−Q1 )
×100
(Q 2+Q 1)/2
(P 2−P 1 )
×100
( P 2+P 1)/2
(400−300)
X 100
( 400+300)/2
(30−40)
X 100
(30+40 )/2
= 28.57% = - 1 Answer.
-28.57%

Demand Elasticity using Mid-point formula between point E & F:

(Q2−Q1 )
×100
(Q 2+Q 1)/2
(P 2−P 1 )
×100
( P 2+P 1)/2
(600−500 )
X 100
(500+600 )/2
(10−20 )
X 100
(10+20 )/2

= 18.18% = - 0.27 Answer.

66.66%

b) Answer: when the price increases from Rs.50 to Rs.60 the revenue of the shoe sales can be
calculated as :
Revenue = Price x quantity
So before change 18.2%x66.67%

Revenue = 0.1213394

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After change of price Rs. 50 to Rs. 60 .
Formula for Mid Point :
(Q2−Q1 )
×100
(Q 2+Q 1)/2
(P 2−P 1 )
×100
( P 2+P 1)/2
Here P1= 60 Q1 = 200
P2 = 60 Q2 = 100
(200−100)
X 100
(60+50 )/2
(60−50 )
X 100
(60+50 )/2
= 181.81% = - 20.001 Answer.
9.09%

Comment:
When the price was $ 50 before change the total revenue was 0.121 which is less than
1 (i.e Ed < 1) demand is inelastic while when we calculated elasticity after a change in price of $
50 to $ 60, the total revenue is 20 which is greater than 1 and demand is elastic so above result
shows that increase in price cause a total revenue increase.

c) Answer: Here P1 = 20 Q1 = 300

P2 = 30 Q2 = 400

Formula for Mid point :

(Q2−Q1 )
×100
(Q 2+Q 1)/2
(P 2−P 1 )
×100
( P 2+P 1)/2
(400−300)
X 100
( 400+300)/2
(30−20 )
X 100
(30+20)/2

= 28.57% = 1.42 Answer.

20%

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Revenue after change the Price of $ 40 to $ 20 :

Revenue =Price x quantity (After change in Price)

20% x 28.57%
= 0.057 Answer

Revenue when the Price was $ 40 :

Revenue =Price x quantity (After change in Price)

28.57% x -28.57%
= 0.204 Answer

Comment :
When the price was $ 40 the total revenue was 0.2 which is less than 1 mean inelastic
in nature while when we calculated elasticity after a decrease in price from $ 40 to $20 the total
revenue the revenue is also less than 1 as well and inelastic in nature . This means that a decrease
in price cause a revenue decreases.

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Estimated Time: 20 Minutes 04 Marks

Q-3: Describe what will happen to total revenue in the following situations.

a) Price decreases and demand is elastic.

b) Price decreases and demand is inelastic.

c) Price increases and demand is elastic.

d) Price increases and demand is inelastic.

e) Price increases and demand is unitary elastic.

f) Price decreases and demand is perfectly inelastic.

g) Price increases and demand is perfectly elastic.

Answer 3:

a) Price decreases and demand is elastic.

If the price elasticity of demand is elastic (Ed > 1) and price

decreases that decrease in price will lead to a rise in revenue.

b) Price decreases and demand is inelastic.

If the price decreases and demand is inelastic (Ed < 1) resulting to

decrease the overall revenue due to low price and no change in demand .

C) Price increases and demand is elastic.

If the price increases and demand is elastic (Ed >1) the revenue
of the firm will decrease.

d) Price increases and demand is inelastic.

If the price increases and the demand is inelastic (Ed < 1) the
firms total revenue will increases.

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e) Price increases and demand is unitary elastic.

If the price increases and demand is unitary elastic (Ed = 1), the total
revenue of the firm remains the same.

f) Price decreases and demand is perfectly inelastic.

If the demand is perfectly elastic (Ed = 0) the quantity

demanded for a good does not response to a change in price. Example is when a firm increases
its price to 5% the revenue of the firm will also increases to 5%.

g) Price increases and demand is perfectly elastic.

In perfectly elastic demand when price increases the

quantity demanded will decrease and hence the revenue also decreases.

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Estimated Time: 20 Minutes 03 Marks

Q-4: How would each of the following affect the firm's marginal cost, average total cost, and
average variable cost curves? Explain each scenario in few lines.

a) An increase in wages.

b) A decrease in material costs.

c) The government imposes a fixed amount of tax.

d) The rent that the firm pays on the building that it leases decreases.

Answer 4:

a) An increase in wages.

An increase in wages can cause each of these costs curves (marginal

cost, average total cost and average variable cost curves) will increase as well .

b) A decrease in material costs.

A decrease in material costs results in a decrease in the price of

variable input , thus it decreases the Average variable cost, marginal cost and average cost
curves.

c) The government imposes a fixed amount of tax.

When the government imposes a fixed amount of tax, the fixed

cost increases. This leads to increase in average cost and marginal cost while average
variable cost remains unchanged.

d) The rent that the firm pays on the building that it leases decreases.

Rent is a fixed cost it, the effect on the average cost is to

decrease while marginal cost and average variable cost remains the same.

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Estimated Time: 20 Minutes 03 Marks

Q-5: Explain how the value of marginal cost affects the values of average variable cost and
average total cost and what this means for the relationship between the marginal cost curve and
the average variable and total cost curves. Draw & explain it in detail.

Answer 5:

Before explaining the effect of marginal cost affects the values of average variable
cost and average total cost following table should be viewed as below:

Units of output Marginal cost Average Average fixed Average total

(MC) variable cost cost (AFC) cost (ATC)
(AVC)
10
25 $ 267 $ 240 $ 200 $ 440
45 $ 150 $ 200 $ 111 $ 311
58 $ 231 $ 207 $ 86 $ 293
65 $ 429 $ 231 $ 77 $ 308
70 $ 600 $ 257 $ 71 $ 329

Now we can plot the graph with the help of above table to show the relationship between the
marginal cost curve, the average variable cost curve and the average total cost curve as shown
below:

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 The above graphical relationship shows that when production increases the
average total cost and marginal cost both begins to decrease. As shown in the figure the marginal
cost where cuts the average total cost is the minimum average cost. The average total cost begins
to rise after 58 units, as shown in above table while the marginal cost goes on falling up to 45
units and then it begins to increase. On the other hand the average total cost and the marginal
cost remains below it. When the average total cost begins to increase the marginal cost rises
more the average total cost. The marginal cost increases the average variable cost and average
total cost also increases and when the marginal cost decreases the average variable cost and the
total cost also decreases. Hence there is a direct relationship between marginal cost, average
variable cost and average total cost. So we can conclude that when average cost falls the
marginal cost is always lower than the average cost while when the average cost is rising, the
marginal costs always lies above average cost, and in last the marginal cost must cut the average
cost curve at the minimum point of average cost .

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Estimated Time: 30 Minutes 05 Marks

Q-6: Refer to the information of Warsi’s budget and indifference cure (preference) provided in
Figure below to answer the questions that follow. (Good X-Ice Cream Cones & Good Y-Ice
Cream Sandwich)

Refer to Figure above answer the following questions:

a) If the price of an ice cream cone is $2, Warsi’s income is?

b) What is the price of an ice cream sandwich?

c) Suppose, Warsi spend 50% of his budget on both Goods, how much of Good X & Good
Y will be consumed?

d) The slope of the indifference curve is the ratio of the?

e) Warsi’s utility maximizing point is at?

Answer 6:

a) If the price of an ice cream cone is $2, Warsi’s income:

In above given figure the value of ice cream cone is 150 so for price of $
2 we can multiply the 150 (ice cream cone value with $ 2) to get the answer .

150 2 = $ 300

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b) What is the price of an ice cream sandwich?

The total budget is $300 while the maximum number of ice cream sandwich wars
i’s can buy is 100.

So price of an ice cream sandwich = 300/100 = $ 3 .

c) Suppose, Warsi spend 50% of his budget on both Goods, how much of Good X &
Good Y will be consumed?

The no of sandwich = 150/3 = 50 ice cream sandwich.

The no of Ice cream cones = 150/2 = 75 ice cream cones

So Warsi can consume 50 ice cream sandwich and 75 ice cream cones.

d) The slope of the indifference curve is the ratio of the?

The slope of indifference curve is the ratio of the good x and good y i.e ratio of ice
cream cones and ice cream sandwich.

e) Warsi’s utility maximizing point is at?

The utility maximization point is the point A because the curve intersect and
tangent with the budget line.

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Estimated Time: 30 Minutes 05 Marks

Q-7: Refer to the information provided in Table below to answer the question that follows.
Remember both Asif & Rouhaan has strong competition and their firms are non-collusive (non-
cooperative).

“Table”

Rouhaan's Strategy Rouhaan's Strategy

Advertise Don't Advertise
Asif's Strategy A's profit $200 thousand A's profit $300 thousand
Advertise R's profit $200 thousand R's profit $100 thousand

Asif's Strategy

Don't A's profit $100 thousand A's profit $250 thousand

Advertise R's profit $300 thousand R's profit $250 thousand

a) What is the Nash equilibrium in the game?

b) What is the Asif’s & Rouhaan’s profit at Nash equilibrium in this game?

c) What is the Asif’s dominant strategy? Explain this dominant strategy in few lines?

d) What happens if both Asif & Rouhaan Cooperate with each other? What will happen to
their profits and strategy? Explain and compare cooperative and non-cooperative
strategies with actual profits given in table?

Answer 7:

a) What is the Nash equilibrium in the game?

The Nash equilibrium is the game when both firms advertises its product as this
strategy give better pay off rather than option for not advertising. The same condition exist for
Asif, thus when both companies advertises there product is Nash equilibrium.

b) What is the Asif’s & Rouhaan’s profit at Nash equilibrium in this game?

The profit of Asif & Rouhaan’s Nash equilibrium in the game is $ 200
thousand each.

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C) What is the Asif’s dominant strategy? Explain this dominant strategy in few lines?

The dominant strategy of Asif is to advertise , it is because if Rouhaan’s

advertises he gains more by advertisement ($ 200 thousand) than without advertising ($ 250
thousand) infect it is more dominant for Asif to advertise

d) What happens if both Asif & Rouhaan Cooperate with each other? What will happen
to their profits and strategy? Explain and compare cooperative and non-cooperative
strategies with actual profits given in table?

Answer:
If both the firms cooperate and decide not to advertise their profits will increase and
may goes up to $ 250 thousand each. The non cooperative strategy is also the Nash equilibrium
strategy for both advertising and gaining profit of $ 200 thousand but if the both can manage a
deal and cooperate they can each get $ 250 thousand respectively.

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