Spring 2009 Eco401 3 Vuabid

Assignment Eco401

Spring 2009

ECO401 –Economics Spring 2009 Marks: 40 NOTE: READ AND STRICTLY FOLLOW ALL THESE INSTRUCTIONS BEFORE SOLVING THE ASSIGNMENT. INSTRUCTIONS • • • • • •

This assignment covers Lesson # 01-38. Do not use red color in your assignment. It is used only for marking purpose. Last date for submission of assignment is 09-06-2009. It means you can submit your assignment till 10-06-2009, 12’O clock mid night. Upload your assignment with in due date and time. No assignment will be accepted after due date and time via email. Assignment once uploaded on VULMS will not be replaced in any case. So, make sure to upload the correct assignment file. Write down only one option in the answer sheet which you think is correct or most appropriate amongst the given options. More than one answer will be marked ZERO.

• Use only Micro Soft Excel file (.xls file format). Its link is given on the announcement page. • • • •

• •

Do not submit your assignment as a PDF, image, HTML, Notepad, WordPad or MS-Word file; it will be marked as ZERO. Submit your solution file as the TABULATED format given on the next page; otherwise it will be marked as ZERO. Exactly copied assignments will be marked as ZERO. A link of the following answer sheet is also given on the announcement page of eco401, take it from there or copy the following sheet and solve your assignment by providing answer in the given column. In the “Correct Option” column, write down only the option number (e-g A, B, C, D) against each question number which you consider is the correct one. Upload only the answer sheet on VULMS. Don’t upload the whole assignment.

Assignment Eco401

Spring 2009

CASE 1 PACIFIC COPPER INDUSTRY Pacific copper industry, a family-owned business, produces copper that is purchased by other firms to make wire, tubing and sheets. The copper is produced in 1000 pounds ingot and is identifiable as having been produced by Pacific copper only by the firm’s name stamped on each ingot (brick). PART 1 Pacific operates the only copper mine and smelter in the South Pacific region. Because imports are limited by high transportation costs, the firm is essentially a monopoly with respect to the sale of copper ingots. The only real source of competition comes from scrap copper that has been melted back into ingot form. However, this scrap copper is considered inferior by buyers and sells for a substantially lower price. Pacific copper sells to approximately 200 firms in the region. Individual purchases are typically made by experienced buyers, but orders tend to be small and frequent to allow buyers to keep their inventory cost down. Although Pacific maintain a publish list of prices, it is not uncommon for preferred customers to be secretly quoted a lower price or better credit terms. Management estimates the demand for the firm’s product is given by the following equation. P = 2975 – 0.10Q Where P is the price per ton and Q is the number of tons sold per year. Regression analysis suggests that the firm’s average and marginal cost equation are: AC = 2393 – 0.10Q MC = 2393 – 0.05Q Where, AC and MC are average and marginal costs per ton. PART 2 After 2 years, eight new firms enter the market. At the present time, Pacific has a 50% share of copper ingot sales and the rest of the market is shared equally by the eight new firms. During a recreational outing in ALASKA, the managers of the nine copper producing firms decide to collude and set the price of ingot at the monopoly level.

Assignment Eco401

Spring 2009

Read the above case study carefully and write down the correct option number (e-g A, B, C, D) in the given Excel file. 1- If the objective of Pacific management is short run profit maximization then the optimal level of output for the Pacific firm is: Marks: 5 A. B. C. D.

3,798 3,880 3,910 4,005

2- The optimal level of price for the Pacific firm is: Marks: 2 A. B. C. D.

$2,587 $2,592 $2,602 $2,680

3- The amount of total cost of producing copper ingot by the Pacific firm is: Marks: 3 A. B. C. D.

$76, 82,220 $77, 00,997 $77, 79,400 $78, 99,009

4- The amount of total revenue earned by the Pacific firm is: Marks: 2 A. B. C. D.

$1,00,16,280 $1,00,36,500 $1,00, 37,560 $1,01, 56,820

5- The amount of total profit earned by the Pacific firm is: Marks: 2 A. B. C. D.

$20, 01,520 $20, 50,205 $21, 25,350 $22, 58,160

Assignment Eco401

Spring 2009

6- Periodically, Pacific advertises in local business publications. Advertising cost of Pacific firm is estimated to be $1000 per year. What will be the impact of this advertising cost on the price level of copper ingot? Marks: 1 A. B. C. D.

The price level of copper ingot will rise. The price level of copper ingot will fall. The price level of copper ingot will remain the same. The price level of copper ingot will rise first and then fall.

7- When the nine firms decide to cooperate with each other in the setting of prices and quantities, this is an example of: Marks: 1 A. Collusion. B. Price leadership. C. Monopolistic competition. D. Perfect competition. 8- According to the demand function estimated by the Pacific management, which of the following statements is TRUE about the demand curve for copper ingot? Marks: 1 A. B. C. D.

Demand curve is upward-sloping. Demand curve is downward-sloping. Demand curve is vertical. Demand curve is horizontal.

9- For a monopolist, changes in demand will lead to changes in: Marks: 1 A. B. C. D.

Price with no change in output. Output with no change in price. Both price and output. None of the given options.

Assignment Eco401

Spring 2009

10- Use the following two statements to answer this question: I. For a monopolist, at every output level, average revenue is equal to price. II. For a monopolist, at every output level, marginal revenue is equal to price. Marks: 1 A. B. C. D.

Both I and II are true. I is true, and II is false. I is false, and II is true. Both I and II are false.

11- Which of the following is NOT true for monopoly? Marks: 1 A. The profit maximizing output is the one at which marginal revenue and marginal costs are equal. B. The profit maximizing output is the one at which the difference between total revenue and total cost is largest. C. The monopolist's demand curve is the same as the market demand curve. D. At the profit maximizing output, price equals marginal cost.

Assignment Eco401

Spring 2009

CASE 2 THE MARKET FOR HUMAN KIDNEYS Should people have the right to sell parts of their bodies? Congress believes the answer is no. In 1984; it passed the National Organ Transplantation Act, which prohibits the sale of organs for transplantation. Organs may only be donated. Although the law prohibits their sale, it does not make organs valueless. Instead, it prevents those who supply organs (living persons or the families of the deceased) from reaping their economic values. It also creates a shortage of organs. Each year, about 8,000 kidneys, 20,000 corneas, and 12,000 hearts are transplanted in the United States, but there is considerable excess demand for these organs and many potential recipients must do without them. Some potential recipients die as a result. To understand the effects of this law, let’s consider the supply and demand for kidneys. First the supply curve. Even at the price of zero (the effective price under the law), donors supply about 8,000 kidneys per year. But many other people who need kidney transplant cannot obtain them because of the lack of donors. It has been estimated that 4,000 more kidneys will be supplied if the price were $20,000. We can fit a linear supply curve to this data. That is a supply curve of the form Q = a + bP. Thus the supply and demand functions can be written as: Supply: Qs = 8000 + 0.2P Demand: Qd = 16000 – 0.2P Because the sale of kidneys is prohibited, the supply is limited to 8,000 (the number of kidneys that people donate). This constrained supply can be plotted as a vertical line. Many complex and ethical issues are involved in the sale of organs. These issues are important, and this example is not intended to sweep them away. Economics, the dismal science, simply shows us that human organs have economic value that can’t be ignored, and that prohibiting their sales imposes a cost on society that must be weighed against the benefits.

Assignment Eco401

Spring 2009

Read the above case study carefully and write down the correct option number (e-g A, B, C, D) in the given Excel file.

12- Using the given supply and demand functions, the market clearing price level for human kidneys can be estimated as: Marks: 2 A. B. C. D.

$19,962 $20,000 $20,258 $21,272

13- Using the same scenario, the market clearing quantity for human kidneys can be estimated as: Marks: 2 A. B. C. D.

11,658 11,990 12,000 12,989

14- At market clearing level of price and quantity, the reasonable estimate for the price elasticity of demand for human kidneys is: Marks: 3 A. - 0.3333 B. - 0.3643 C. 0.3882 D. 1.3512

15- At market clearing level of price and quantity, the reasonable estimate for the price elasticity of supply for human kidneys is: Marks: 3 A. - 0.2643 B. 0.0882 C. 0.3333 D. - 1.3812

Assignment Eco401

Spring 2009

CASE 3 PAKISTAN’S ECONOMY In the face of adverse internal and external developments of an extraordinary nature, Pakistan’s economy has shown great resilience against shocks of very high intensity. Domestic factors like heightened political tensions, an unstable law and order situation, supply shocks, coupled with external factors like a worsening of international financial crisis, and an unprecedented rise in global food and energy prices tested the strength of economic fundamentals but Pakistan’s economy grew robustly in 2007-08, as compared to last year. Pakistan’s real per capita income has risen at a faster pace during the last six years leading to a rise in average income of the people. Such increases in real per capita income have led to a sharp increase in consumer spending during the year. Relatively slower growth in consumption in 2005-06 and 2006-07 was mainly attributed to the tight monetary policy pursued by the State Bank of Pakistan but with rising inflation real interest rate actually declined and thus boosted private consumption in the current year. The data about the components of expenditures of Pakistan economy for the year 2007 is given in the following table:

Components of expenditures (2007) Total (billions of dollars) Consumption Nondurable goods Durable goods Services Investment Nonresidential fixed investment Residential fixed investment Inventory investment Government purchases Defense expenditures Non defense expenditures State and local expenditures Net exports Exports Imports

2309.00 1282.80 5694.40 1583.80 639.20 -5.90 682.90 817.10 1995.50 1862.40 2270.80

Assignment Eco401

Spring 2009

Read the above case study carefully and write down the correct option number (e-g A, B, C, D) in the given Excel file.

16- The Gross Domestic Product (GDP) for the year 2007 is: Marks: 2 A. B. C. D.

$13707.60 billion $14590.40 billion $14962.60 billion $15835.60 billion

17 – The net exports for the year 2007 is: Marks: 2 A. B. C. D.

$406.80 billion -$407.20 billion -$408.40 billion $409.60 billion

18- If the depreciation in the year 2007 is $1380 billion then what is the amount of Net Domestic Product (NDP)? Marks: 2 A. B. C. D.

$11426.63 billion $12306.54 billion $12400.80 billion $13210.40 billion

19- Suppose nominal GDP for year 2007 grew from $10,000 billion to $12,000 billion in 2 years. Over the same 2 years, the inflation rate was exactly 4 percent each year. What will be TRUE about the output level over these 2 years? Marks: 2 A. B. C. D.

Output will fall. Output will stay at the same level. Output will grow, but less than 4 percent. Output will grow by 4 percent.

Assignment Eco401

Spring 2009

20- If the GDP deflator was 100 in the base year of 2006, and was 105 in 2007, we can say that: Marks: 2 A. B. C. D.

The price level increased by 5 percent from 2006 to 2007. The price level increased by 205 percent from 2006 to 2007. The price level increased by 105 percent from 2006 to 2007. We cannot judge price increases from changes in the GDP deflator.

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