1.Explain what does an Indifference curve shows?

Briefly any explain any two characteristics of indifference

curves. (3 marks)

2.Solve the give questions using diagrams wherever necessary.

I. If the price is increased by 2%, the quantity demanded decreases by 1.2%, what is the price elasticity
of demand? (1 mark )

II. If the price elasticity of supply of doodads is 0.60 and the price increases by 3 percent, then the
quantity supplied of doodads will rise by? (1 mark )

III. In a market for luxury car, the only consumer in the market for “ABC Car” was Ahmed. When the
price of “ABC Car” varies between $10000 and $20000 the price elasticity of his individual demand is
equal to negative 1. Now imagine that Ahmed has been cloned 5 times, and now we have 6 identical
consumers in the market for “ABC Car”. What will happen to the price elasticity of market demand
in the price range given above? Will the demand become more price elastic, less price elastic, or will
elasticity stay the same? Explain your answer. (2 marks )

Multiple choice question and fill in the blanks .All questions carry equal marks. (6 marks)

I. A price floor set above the market equilibrium price is likely to cause:

a. excess supply
b. excess demand
c. a decrease in price and a decrease in the quantity traded
d. an increase in price and an increase in the quantity traded

II. If cross elasticity of demand between Goods X and Y is negative then:

a. the demand for both X and Y are price inelastic

b. X and Y are complements
c. X and Y are substitute
d. the demand for both X and Y are price elastic

III. Which of the following will NOT cause a shift in the Production Possibility Curve

a. A fall in unemployment
 b. Increase in age of retirement
c. Technological improvement
d. Capital investment

IV. Which one of the following statements is NOT true for a planned economic system?

a.Productive resources are state owned

b.Auto-adjusted price mechanism
c. Full employment is possible
d.Less duplication of resources

V. Complementary goods have ______________ income elasticity and substitute goods have ______
income elasticity.

VI. A fall in price of one good that is complementary to another good will shift the demand curve of to
the ______________ and _____________ of it will be purchased at each price.