Quaid-i-Azam School of Management Sciences (QASMS)

Quaid-i-Azam University Islamabad

Assignment # 1

MSM-683 Economic Analysis

MBA

Time Allowed: 2 Weeks Total Marks: 100

Term: Spring 2021 Instructor: Dr. Ahsan Abbas

Q.1 Table below presents different combinations of a simple economy that uses its resources to
produce guns or/and butter

Option Butter (tonnes) Guns (units)

A 0 15
B 1 14
C 2 12
D 3 9
E 4 5
F 5 0

a) Construct the PPC by drawing guns production on the vertical axis and butter production
on the horizontal axis and determine its slope.
b) Consider that the economy is producing at option C. Explain the concept of the
opportunity cost if the economy increased the production of butter and moved its
production to point D
c) Calculate the opportunity cost if there is a move from C to D and later a further move
from D to E
d) Is the opportunity cost increasing or decreasing as the economy produces more butter?
Fully explain why

Q.2 Draw a circular-flow diagram for a four-sector economy. Identify the each part of the
model that correspond to the flow of inputs/resources/goods and services and the flow
of rupees/expenditure/income/revenue/receipts.

Q.3 Suppose a student’s entire weekly pocket money (income) is spent on cafeteria’s fast
food and hut’s meal. Draw his (weakly) budget line if he has total amount of Rs. 1500
per week, the price of fast food is Rs. 150 per unit and the price of meal is Rs. 100 per
unit. Draw the new budget lines: (a) if the price of fast food doubles; (b) if the price of
 meal halves; (c) if his pocket money/income rises to Rs. 2500 per week; (d) if his pocket
money/income falls to Rs. 1000 per week.

Q.4 Draw your indifference curves for two commodities:

(a) where you regard one and two as perfect complements;

(b) where you regard one and two as perfect substitutes;

(c) where you regard one and two as substitutes;

(d) where you regard commodity one as bad and two as good commodity;

(e) where you regard commodity one as neuter and two as bad commodity;

Q.5 (a) What are the effects of an increase in the price of good A on a consumer’s demand if

i) good A is a normal good.

ii) good A is an inferior good.

iii) good A is a Giffen good.

Explain your answer with reference to income and substitution effects.

(b) When total utility is maximum, marginal utility will be negative. True or false? Explain your
answer.

(c) How will you resolve the diamond-water paradox of differing prices? Explain.

(d) If MUA/MUB < PA/PB, the individual would increase/decrease the consumption of A
relative to B. Evaluate.

(e) If Qd = 10/P then total revenue will be increasing in Qd and elasticity of demand is constant
and elastic.