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Section “A”

Answer the below questions. Each question carries 10 marks.

1. Explain the different factors affecting Supply with a well-labelled diagram.

1. Explain the different types of Costs in a tabular format & with a well-labelled diagram.

a)  Demand of a product is usually very sensitive to economic variables, such as the prices and consumer income. This responsiveness of demand is elasticity. Compute elasticity in the below scenarios: Yesterday, the price of envelopes was \$3 a box, and Jacky was willing to buy 10 boxes. Today, the price has gone up to \$3.75 a box, and Jacky is now willing to buy 8 boxes. Is Jacky’s demand for envelopes elastic or inelastic? What is Jacky’s elasticity of demand?

b)  Katy advertises to sell cookies for \$4 a dozen. She sells 50 dozen, and decides that she can charge more. She raises the price to \$6 a dozen and sells 40 dozen. What is the elasticity of demand?

1. Demand of a product is usually very sensitive to economic variables, such as the prices and consumer income. This responsiveness of demand is elasticity. Explain the different types of demand elasticity with appropriate formulae.

1. Assume the demand being perfectly inelastic, and supply suddenly doubles due to innovative technique of production. Illustrate in a well labelled graph, the changes in the equilibrium price, and quantity, and also is it advisable to do so from supplier point of view.

Section “B”

Answer the below questions. Each question carries 20 marks.

1).  An economist might say that Starbucks is perfectly competing in a monopolistically competitive market Because you just need an espresso maker and some beans, market entry is easy. But to be successful, you need something unique–the monopolistic part. Starbucks, through its beans, its barista training and its store design competed successfully. Also, facing monopolistic competition in large cities like NY and Chicago, they needed a store on every block. In light of this

a).  Apply your understanding and concepts from microeconomics, to investigate and summarize the major characteristics of the coffee industry.

b).  Describe and analyze the pricing policies that you would expect to find in this industry.

2).  After several years of decline, the market for handmade acoustic guitars is making a comeback. These guitars are usually made in small workshops employing relatively few highly skilled luthiers. Assess the impact on the equilibrium price and quantity of handmade acoustic guitars as a result of each of the following events. In your answers indicate which curve(s) shift(s) and in which direction.

a).  Environmentalists succeed in having the use of Brazilian rosewood banned in the United States, forcing luthiers to seek out alternative, more costly woods.

b).  A foreign producer reengineers the guitar-making process and floods the market with identical guitars.

c).  Music featuring handmade acoustic guitars makes a comeback as audiences tire of heavy metal and grunge music.

d).  The country goes into a deep recession and the income of the average American falls sharply.