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ECO401 Economics Assignment 1 Solution Fall 2013

  CASE 01:
The local sports goods manufacturing industry is one of the major source of foreign
exchange earnings of Pakistan. At present, there are more than 2000 units of sports
goods, mostly on small scale in operation, with an installed capacity of Rs.20 billion per
annum. These units are operating on single-shift basis. However, due to increased
competition globally, the industry can no longer enjoy the profit; it did in the region
earlier. But in Pakistan, due to shortage of electricity and high research and development
cost, price of sports goods remained at very high level. What will be the effect on the
equilibrium situation of sports goods industry if cost of production of sports goods
increases due to high per unit cost of electricity. Illustrate graphically.
(Marks: 6)
CASE 02:
Pakistan is an agrarian economy. Fertility of its land allows producing multiple products.
In a number of farms of Punjab, producers are able to switch back and forth between rice
and wheat production depending on market conditions. Similarly, consumers tend to
regard wheat and rice as substitutes. As a result, the demand and supply of rice is highly
sensitive to change in both rice and wheat prices. Quantity demanded and quantity
supplied equations for rice is as follows:
QD=2000-28P
QS=-2020+85P
a) Calculate the market equilibrium level of output and price.
b) If P = Rs.50 then how much amount of shortage or surplus would occur?
(Marks: 6+3)
CASE 03:
K&Ns is a leading brand for meat production. It has generated influential number of sales
and revenues from its launching of different products. In year 2010, it has planned to
enhance its sales up to Rs.65, 000 million from Rs.59, 000 million. It hired an economic
advisor for policy recommendation regarding this target achievement. Advisor advised to
increase its advertisement expenditures from Rs.9, 200 to Rs.10, 000. Management of
this company wants to evaluate that increase advertisement expenditures will enhance
sales for meat. Calculate the average advertising arc elasticity of demand for K&Ns.
(Marks: 5)

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