Professional Documents
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Refrigerators
03
Robots
The assumptions are:
Full employment ½
Productive efficiency ½
Fixed supplies of resources ½
Fixed technology ½
(b) Mrs. Saira is not buying the utility-maximizing combination of bread and milk since the marginal
utility per rupee spent on each good is not equal. The marginal utility per rupee of bread is 0.8 (80
utils ÷ Rs.100); the utility per rupee of milk is 1.75 (70 utils ÷ Rs.40). Mrs. Saira should buy more
milk and less bread. 04
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SUGGESTED SOLUTIONS/ ANSWERS – SPRING 2016 EXAMINATIONS 2 of 7
(b) Though it is true that “all firms compete for the rupees of consumers” it is playing on words to
hold that pure monopoly does not exist. For example, the pure monopoly enjoyed by the local
electricity company in any town. If you wish electric lights, you have to deal with the single
company. It is a pure monopoly in that regard, even though you can switch to oil or natural gas
for heating. Of course, you can use oil, natural gas, or kerosene for lighting too – but these are
hardly convenient options. 03
The concept of cross elasticity of demand can be used to measure the presence of close
substitutes for the product of a monopoly firm. If the cross elasticity of demand is greater than
one, then the demand that the monopoly faces is elastic with respect to substitute products, and
the firm has less control over its product price than if the cross elasticity of demand were
inelastic. In other words, the monopoly faces competition from producers of substitute products. 03
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electronic, mechanical, photocopying, recording or otherwise without prior permission of the ICMA Pakistan. The suggested answers provided on and made available through the
Institute’s website may only be referred, relied upon or treated as a guide and substitute for professional advice. The Institute does not take any responsibility about the accuracy,
completeness or currency of the information provided in the suggested answers. Therefore, the Institute is not liable to attend or receive any comments, observations or critiques
related to the suggested answers.
SUGGESTED SOLUTIONS/ ANSWERS – SPRING 2016 EXAMINATIONS 3 of 7
Question No. 4
(b) (i) With the same costs, the pure monopolist will charge a higher price, have a smaller output,
and have higher economic profits in both the short-run and the long-run than the pure
competitor. As a matter of fact, the pure competitor will have no economic profits in the
long-run even though it might have some in the short-run. Because the monopolist does not
produce at the point of minimum ATC and does not equate price and MC, its allocation of
resources is inferior to that of the pure competitor. Specifically, resources are under allocated
to monopolistic industries. Since a pure monopolist is more likely than the pure competitor to
make economic profits in the short-run and is, moreover, the only one of the two able to
make economic profits in the long-run, the distribution of income is more unequal with
monopoly than with pure competition. 04
(ii) In pure competition, MR = P because the firm’s supply is so insignificant that its output has
no effect on price. It can sell all that it wishes to at the price established by demand and the
total industry supply. The firm cannot force the price up by holding back part or all of its
supply. 01
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students and faculty members only. No part of it can be reproduced, stored in a retrieval system or transmitted in any physical/ or electronic form or by any other means including
electronic, mechanical, photocopying, recording or otherwise without prior permission of the ICMA Pakistan. The suggested answers provided on and made available through the
Institute’s website may only be referred, relied upon or treated as a guide and substitute for professional advice. The Institute does not take any responsibility about the accuracy,
completeness or currency of the information provided in the suggested answers. Therefore, the Institute is not liable to attend or receive any comments, observations or critiques
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SUGGESTED SOLUTIONS/ ANSWERS – SPRING 2016 EXAMINATIONS 4 of 7
(iii) Economies of scale may be such as to ensure that one large firm can produce at lower cost
than a multitude of small firms. This is certainly the case with most public utilities. And in
such industries as basic steelmaking and car manufacturing, pure competition would involve
a very high cost. On the other hand, monopolies may suffer from X-inefficiency, the
inefficiency that a lack of competition allows. Monopolies may also incur non-productive
costs through “rent-seeking” expenditures. For example, they may try to influence legislation
that protects their monopoly powers. 02
The implications of the lower costs that economies of scale may give a monopolist not only
produce at a lower cost than pure competitors but, in some cases, may also sell at a lower
price. If such is the case, the misallocation of resources is reduced. 01
Question No. 5
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electronic, mechanical, photocopying, recording or otherwise without prior permission of the ICMA Pakistan. The suggested answers provided on and made available through the
Institute’s website may only be referred, relied upon or treated as a guide and substitute for professional advice. The Institute does not take any responsibility about the accuracy,
completeness or currency of the information provided in the suggested answers. Therefore, the Institute is not liable to attend or receive any comments, observations or critiques
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SUGGESTED SOLUTIONS/ ANSWERS – SPRING 2016 EXAMINATIONS 5 of 7
540
510 C
480
Consumption
450
420
390 02
360
330
300
100
80
Saving
60 S
02
40
20
Question No. 6
(a) Quantity Theory of Money asserts that the value of money depends largely on the quantity of
money. If the quantity of money is increased without corresponding increase in volume of
production, the value of money will decrease and vice-versa. 01
According to Irwin Fisher, the function of money primarily is to serve as a medium of exchange. It
has an indirect or derived demand because it is demanded for its purchasing power and not for
its own sake. Therefore, the value of money entirely depends upon its quantity in circulation
within the country. It is also called Cash Transactions Approach or Fisher's Approach. 02
According to Irwin Fisher,
“Other things remaining the same, value of money falls in proportion to increase in quantity of
money in circulation." 01
It means if the quantity of money is increased by 25%, whereas other things remain unchanged,
the value of money will fall by 25%, and vice versa. Thus, the quantity of money and its value are
inversely related. 01
Irwin Fisher explained the relationship between the quantity of money and its value in the form of
an equation of exchange.
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Institute’s website may only be referred, relied upon or treated as a guide and substitute for professional advice. The Institute does not take any responsibility about the accuracy,
completeness or currency of the information provided in the suggested answers. Therefore, the Institute is not liable to attend or receive any comments, observations or critiques
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SUGGESTED SOLUTIONS/ ANSWERS – SPRING 2016 EXAMINATIONS 6 of 7
01
Where, P stands for general price level, or P = the value of money.
T stands for total transactions (total amount of goods and services) exchanged for
M stands for actual money
M' stands for credit money
V stands for velocity (rate of exchanging hands) of actual money
V' stands for velocity of credit money
Fisher contends that, in the short period, T, V, and V’ remains constant. Likewise, the proportion
of M to M' also remains constant. Thus, P varies directly with M. In other words; P or value of
money varies inversely with M or quantity of money.
Fisher’s Quantity Theory of Money can also be explained with the help of a simple example.
Suppose, the supply of actual money (M) issued by the government and the Central Bank, in
circulation in the country at certain time is Rs. 1,000 and its velocity (V) is 10. The amount of
credit money (M’) in circulation is Rs. 2,000 and its velocity (V') is 5. The total volume of
transaction (T) is 500. The equation of exchange will be as under:
02
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SUGGESTED SOLUTIONS/ ANSWERS – SPRING 2016 EXAMINATIONS 7 of 7
THE END
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Institute’s website may only be referred, relied upon or treated as a guide and substitute for professional advice. The Institute does not take any responsibility about the accuracy,
completeness or currency of the information provided in the suggested answers. Therefore, the Institute is not liable to attend or receive any comments, observations or critiques
related to the suggested answers.