Pir Mehr Ali Shah

Arid Agriculture University, Rawalpindi

Office of the controller of Examinations
Mid Exam Spring 2021 (Paper Duration 12 hours)
To be filled by Teacher

Course No.: ……ECON-301………Course Title:……………………………… introduction to economics……

Total Marks:……….………18………………Date of Exam:…………………....03/05/2021.............................
Degree: ………………BSCS……………….Semester:…………6TH…………… Section:……………B……………………
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Q. No. 1 2 3 4 5 6 7 8 9 10 Obtained/
TotalMarks
Marks
Obtaine
d
Total Marks in Words:
Name of the teacher:
Who taught the course: Signature of teacher / Examiner:

To be filled by Student

Registration No.: 18-ARID-5198 Name: Muhammad Atta Ur Rehman

Answer the following questions.

Question 1) The government has decided that the free market for the
dairy product is too low (1+2+2)
Suppose the government impose the binding price floor in the dairy
product market.
a) Draw the supply demand diagram to show the effect of this
policy on the price of dairy product and their quantity
demanded.is there a shortage or surplus?
Answer: diagram:

There is surplus of dairy product of in the market.

 b) The producers of dairy product claim that price floor has
reduced their total revenue, is this possible? Explain
Answer: yes it is possible it depends on the quantity demanded at the floor
price that the revenue is greater or smaller than initial market equilibrium
c) Government tends to peruse a new policy. Compared to the
basic price floor, who is the beneficiary and who are at lose?
Answer: producers get benefit from government new policy like producer
revenue increases and also producer surplus also increases. Consumer at loss
and consumer surplus also decreases
Question 2) What happen to total profit, consumer and total surplus
when monopolist go for perfect price discrimination? Discuss in detail
and support your argument with graph? (2+2)
Answer: Total profit of monopolist increases because of prefect price
discrimination and great negative effect on the consumer because demand curve
moves down and also the total surplus of monopolist increases because at higher
the consumer surplus products sale then the more revenue generate by producer
and consumes all available consumer surplus

This graph shows that the p2 is least price where the quantity demand is higher
gradually the price increases in p1 & p the quantity demand low this shows that
if prefect price discrimination applies then the prices high the demand curve
moves downward.
Question 3) Developing countries have a low standard of living, yet
many have much wealth in natural resources which multi-national
companies would like to exploit, Discuss which is the better way of
increasing the standard of living: to allow multi-national companies to
exploit all the natural resources, or for the government to increase
expenditure on education and health? (3)
Answer: there are some ways mention below by which multi-national
companies to exploit all the natural resources and increasing the standard of
living.
 1) Multinationals provide an inflow of capital into the developing country.
Which helps government to increase expenditure on health and education
E.g. the investment to build the factory is counted as a capital flow on the
financial account of the balance of payments. This capital investment
helps the economy develop and increase its productive capacity.
2) Multinational firms may help improve infrastructure in the economy.
They may improve the skills of their workforce. Foreign investment may
stimulate spending in infrastructure such as roads, health, education and
transport.
3) The inflows of capital help to finance a current account deficit.
(Basically, this means that foreign investment enables developing
countries to buy imports.)
4) The Harrod-Domar model of growth suggests that this level of investment
is important for determining the level of economic growth. One of the
best ways to increase the level of economic growth is to provide an
inflow of capital from abroad.
5) Multinational firms help to diversify the economy away from relying on
primary products and agriculture – which are often subject to volatile
prices and supply.
6) Multinational corporations provide employment. Although wages seem
very low by Western standards, people in developing countries often see
these new jobs as preferable to working as a subsistence farmer with even
lower income.
These all point help government to generate revenue and increase the money
of country which increases expenditure by the government on education and
health
Question 4: explain why/when
a) The situation of consumer and producer surplus arises? (1)
Answer: why:
Producer surplus is defined as the difference between the amount
the producer is willing to supply goods for and the actual amount received
by him when he makes the trade.
Consumer surplus is defined as the difference between the amount for
product consumer willing to pay due to the satisfaction after use and the
amount on which consumer buy the product.
When:
A consumer surplus happens when the price consumers pay for a product or
service is less than the price they're willing to pay. Consumer surplus
always increases as the price of a good falls and decreases as the price of a
good rises.
A producer surplus is generated by market prices in excess of the lowest
price producers would otherwise be willing to accept for their goods.
 b) Producers and sellers are bound to follow law of supply? (1)
Answer: why:
Law of supply states that if price for a product increases, supply also
increases and vise versa. Keeping all external factors remain constant.
Producer is always willing to get most of the benefit.
When:
if price of a product decreases then producer will reduce the supply for that
product as would be willing when price will rise again.
For consumer the price arises when supply increase so he try to consume less
until it came back to equilibrium state where both agrees.

c) Price of petrol are increased due to change in sensitivity of

consumers? (1)
Answer: why:
Consumer price sensitivity is the degree to which price of a product affect
consumer’s purchasing behavior. Prices of petrol increases
When:
Producing countries are producing less oil so the prices hike up. Petrol is a
basic need for human life so, consumers are more price sensitive towards
this.

Question 5) Scarcity and choices go all together, defend and refute

the statement with example? (3)
Answer: I’m defending this statement because Scarcity of resources having
alternative uses compels every individual and society to make choices in the use
of resources in order to obtain maximum satisfaction. Clearly choice arises
because of scarcity. Thus scarcity and choice go together .for example like in
last some years the scarcity of sugar face in Pakistan so the alternative of sugar
like coconut sugar, honey, agave nectar and date paste is used as an alternative
during scarcity of sugar.