1. Define economics & State the differences between microeconomics and macroeconomics?

Answer: Economics is the study how societies use scarce resources to produce valuable commodities and
distribute them among different people. Generally the concept of economics can be divided into two types
as micro and macro economics. There are many differences between them that are given below:
Points of
distinctions
Origination

Definition

Microeconomics

Macroeconomics

The word Micro comes from the

Greek word Mikros which means
small.
Microeconomics studies the economic
behavior of individual economic
decision makers, such as a consumer, a
worker, a firm, or a manager.

The word Macro is also from a Greek

word Makros which means large.

Macroeconomics studies how an entire

national economy performs, examining
such topics as the aggregate levels of
income and employment, the levels of
interest rates and prices, the rate of
inflation, and the nature of business cycles.
Analyze
Microeconomics analyses the partial The macroeconomics analyses entire.
behavior of economy.
Theory
Microeconomics is price theory which Macroeconomic is called income theory
is the combination of production.
that explains the result of total production
and why the level rises and falls.
Determination Microeconomics is basically concerned Macroeconomics is basically concerned
with the determination of output and with the determination of aggregate output
price for and individual firm or and general price level on the economy as
industry
whole.
Equilibrium
Partial equilibrium method is used in General equilibrium method is used in
microeconomics.
macroeconomics.
Supporters
The classical and the new classical The macroeconomics gets the supports of
economists are the supporters of the the modern economists.
microeconomics

2. Why is economics often described as the science of constrained choice?

Answer: While our wants for goods and services are unlimited, the resources necessary to produce those
goods and services, such as labor, managerial talent, capital, and raw materials, are scarce because their
supply is limited. This scarcity implies that we are constrained in the choices we can make about which
goods and services to produce. Thus, economics is often described as the science of constrained choice.

Why we study microeconomics?

SM Nahidul Islam
Dept. of Finance & Banking (2nd batch)
Answer: We study microeconomics for the following reasons 1. Individual Behavior Analysis: Micro economics studies behavior of individual consumer or
producer in a particular situation.
2. Resource Allocation: Resources are already scarce i.e. less in quantity. Micro economics helps in
proper allocation and utilization of resources to produce various types of goods and services.
3. Price Mechanization: Micro economics decides prices of various goods and services on the basis
of 'Demand-Supply Analysis'.
4. Economic Policy: Micro economics helps in formulating various economic policies and economic
plans to promote all round economic development.
5. Free Enterprise Economy: Micro economics explain operating of a free enterprise economy
where individual has freedom to take his own economic decisions.
6. Public Finance: It helps the government in fixing the tax rate and the type of tax as well as the
amount of tax to be charged to the buyer and the seller.
7. Foreign Trade: It helps in explaining and fixing international trade and tariff rules, causes of
disequilibrium in BOP, effects of factors deciding exchange rate, etc.
8. Social Welfare: It not only analyses economic conditions but also studies the social needs under
different market conditions like monopoly, oligopoly, etc.

Describe the fundamental problems of Economics.

Answer: Central problems of the economy are:
A) What to produce: As the resources are the limited we cannot produce all the goods that we want.
So the economy will have to make a choice between different commodities. Whether to produce
cars or tanks. Moreover as resources are limited we cannot produce unlimited quantities of a good.
So we have to decide in what quantities the goods would be produced.
B) How to produce: It is very important to decide by which method the production should take
place. There are two techniques to perform the production process:
1) Labor intensive technique: In this technique production is done through labors and by
adopting this technique there is greater employment.
2) Capital intensive technique: In this technique production is done through machines and by
adopting this work is done efficiently and faster without much wastage of time
C) For whom to produce: this is the problem of distribution of goods between different income
groups of the society. It tells how many resources are used for the rich and the middle class and
what is left for the poor. It also means the choice between present and future needs.
D) Problem of full employment: An economy must Endeavour to achieve full employment not only
of labor but of all its resources.
E) Problem of growth: Another problem for an economy is to make sure that it keeps expanding of
developing so that it maintains conditions of stability.

Describe the key analytical tools of microeconomics

Or
How does the tool of constrained optimization help decision makers make choices? What
roles do the objective function and constraints play in a model of constrained optimization?
Or
Islamic University, Kushtia

SM Nahidul Islam
Dept. of Finance & Banking (2nd batch)

Why do economists do comparative statics analysis? What role do endogenous variables and
exogenous variables play in comparative statics analysis?
Answer: The main analytical tools of macroeconomics are given below:
A. Constrained optimization allows the decision maker to select the best (optimal) alternative while
accounting for any possible limitations or restrictions on the choices. This tool has two parts:
a. Objective function: The objective function represents the relationship to be maximized or
minimized. For example, a firms profit might be the objective function and all choices will be
evaluated in the profit function to determine which yields the highest profit.
b. Constraint: The constraints place limitations on the choice the decision maker can select and
defines the set of alternatives from which the best will be chosen.
B. Equilibrium analysis: Equilibrium in a system is a state or condition that will continue indefinitely as
long as exogenous factors remain unchangedthat is, as long as no outside factor upsets the
equilibrium. In a competitive market, equilibrium is achieved at a price at which the market clears
-price at which the quantity offered for sale = the quantity demanded by consumers.

In the above figure, Since Qd = Qs at P*, there is no upward or downward pressure on price. Hence, price
could stay at P* indefinitely.
C. Comparative statics analyses are performed to determine how the level of endogenous variables
change as some exogenous variable is changed. This type of analysis is very important since in the
real world the exogenous variables, such as weather, policy tools, etc. are always changing and it is
useful to know how changes in these variables affect the levels of other, endogenous, variables. An
example of comparative statics analysis would be asking the question: If extraordinarily low rainfall
Islamic University, Kushtia

SM Nahidul Islam
Dept. of Finance & Banking (2nd batch)
(an exogenous variable) causes a 30 percent reduction in corn supply, by how much will the market
price for corn (an endogenous variable) increase?

Describe the different types of equilibrium

Answer: Generally equilibrium can be divided into the following types
a. Stable Equilibrium: There is stable equilibrium, when the object concerned, after having been
disturbed, tends to resume its original position. Thus, in the case of a stable equilibrium, there is a
tendency for the object to revert to the old position.
b. Unstable Equilibrium: The equilibrium is unstable when a slight disturbance evokes further
disturbance, so that the original position is never restored. In this case, there is a tendency for the
object to assume newer and newer positions once there is departure from the original position.
c. Neutral Equilibrium: It is neutral equilibrium when the disturbing forces neither bring it back to
the original position nor do they drive it further away from it. Thus, in the case of a neutral
equilibrium, the object assumes once for all a new position after the original position is disturbed.
Other types of Equilibrium:
A. Partial Equilibrium: Partial equilibrium analysis is the analysis of an equilibrium position for a
sector of the economy or for one or several partial groups of the economic unit corresponding to a
particular set of data.
i.
Consumers Equilibrium: Consumer equilibrium analysis is a situation in which a
consumer is getting maximum level of satisfaction from an commodity and has no
tendency to bring change in pattern of consumption.
ii.
Producers Equilibrium: A producer is in equilibrium when he is able to maximise his
aggregate net profit in the economic conditions in which he is working.
iii.
Firms Equilibrium: A firm is said to be in long-run equilibrium when it has attained the
optimum size when is ideal from the viewpoint of profit and utilisation of resources at its
disposal.
iv. Industrys Equilibrium: The situation where and industry has no tendency to increase of
decrease its output is called the equilibrium of industry.
B. General equilibrium: General equilibrium theory studies supply and demand fundamentals in an
economy with multiple markets, with the objective of proving that all prices are at equilibrium.
3. What is the difference between an exogenous variable and an endogenous variable in an

economic model? Would it ever be useful to construct a model that contained only
exogenous variables (and no endogenous variables)?
Answer: Exogenous variables are taken as given in an economic model, i.e., they are determined by some
process outside the model, while endogenous variables are determined within the economic model being
studied. An economic model that contained no endogenous variables would not be very interesting. With
no endogenous variables, nothing would be determined by the model so it would not serve much purpose.

4. What is the difference between positive and normative analysis? Which of the following
questions would entail positive analysis, and which normative analysis?
Islamic University, Kushtia

SM Nahidul Islam
Dept. of Finance & Banking (2nd batch)

a. What effect will Internet auction companies have on the profits of local
automobile dealerships?
b. Should the government impose special taxes on sales of merchandise made over
the Internet?
Answer: Difference between positive economics and normative economics are given below:
Definition

Based
Deals with
Verified
Judgment
problem
Example

a)

b)

Positive Economics
Positive analysis attempts to explain
how an economic system works or to
predict how it will change over time by
asking explanatory or predictive
questions.
It is based on facets.
It deals with actual or realistic situation.
It can be verified with actual data.
In this value judgments are not given.
It deals with how an economic problem
is solved.
The American stock market has boomed
in recent year.

Normative Economics
Normative analysis focuses on what
should be done by asking prescriptive
questions.

It is based on ethics.
It deals with idealistic situation.
It cannot be verified with actual data.
In this value judgments are given.
It deals with how an economic problem
should be solved.
The national minimum wage should be
increased to $5 as a method of reducing
poverty.

Because this question asks whether dealership profits will go up or down (and by how
much) but refrains from inquiring as to whether this would be a good thing it is an
example of positive analysis.
On the other hand, this question asks whether it is desirable to impose taxes on Internet
sales, so it is normative analysis. Notably, this question does not ask what the effect of
such taxes would be.

Describe the different types of economics system?

Answer: There are four types of economic system that are described in below:
1. Market economic system: A market economic system is one in which individuals and private firms
make the major decisions about production and consumption. In case of capital economy, decisions
regarding investment, production and distribution are based on supply and demand. The features of
capitalism economy are

All resources are privately owned by people and firms.

Profit is the main motive of all businesses.
There if no government interference in the business activities.
Consumers are free to choose.

Islamic University, Kushtia

SM Nahidul Islam
Dept. of Finance & Banking (2nd batch)
2. Command economic system: A command economic system is one in which the government makes
the decision on what to produce, how to produce it and who gets it. The features of socialism economy
are:

All the resources are owned and managed by the government.

Government decides what to produce, how much to produce and for whom to produce.
Profit is not the main objects.
The markets forces are not allowed to set the price of the goods and services.

3. Mixed economic system: A mixed economy is one in which the government and the individuals make
the decisions on what to produce, how to produce it and who gets it. In a mixed economy it has
features of both capital and social economy. The features of mixed economy are given below:
Resources are owned both by the government as well as private individuals.
Private and public sectors are required to function in a property coordinated manner.
4. Islamic economic system: The Islamic Economic System is the system which outlines how to gain
wealth, invest it, spend and distribute it justly and also how to achieve financial equality among the
people. The Islamic Economic System is established on the foundation of justice and providing the
needs of the people to save them from poverty and need.

Allah is the Sustainer

God is Real Owner of Everything and Man is Merely a Trustee
Everything Created for Service and Use of Man
Prohibition of Interest
Ban on Hoarding of Wealth

Solutions to Problems
1. Discuss the following statement: Since supply and demand curves are always shifting,
markets never actually reach equilibrium. Therefore, the concept of equilibrium is useless.
While the claim that markets never reach an equilibrium is probably debatable, even if markets do not
ever reach equilibrium, the concept is still of central importance. The concept of equilibrium is important
because it provides a simple way to predict how market prices and quantities will change as exogenous
variables change. Thus, while we may never reach a particular equilibrium price, say because a supply or
demand schedule shifts as the market moves toward equilibrium, we can predict with relative ease, for
example, whether prices will be rising or falling when exogenous market factors change as we move
toward equilibrium. As exogenous variables continue to change, we can continue to predict the direction
of change for the endogenous variables, and this is not useless.
2. The demand for computer monitors is given by the equation Qd = 700 - P, while the supply is
given by the equation Qs = 100 + P. In both equations P denotes the market price. Fill in the
following table. For what price is the market in equilibriumsupply equals to the demand?
P

200

250

300

350

400

Islamic University, Kushtia

SM Nahidul Islam
Dept. of Finance & Banking (2nd batch)
Qd
Qs

Answer:
P

200

250

300

350

400

Qd

500

450

400

350

300

Qs

300

350

400

450

500

1.9
The demand for computer memory chips is given by the equation Qd = 500 2P, while the
supply is given by the equation Qs = 50 + P. In both equations P denotes the market price. For what
price is the market in equilibrium supply equals demand? What is the equilibrium quantity?
P

50

100

150

200

250

Qd
Qs

As shown in the table below, the equilibrium price is 150, and the equilibrium
quantity is 200.

Answer:
P

50

100

150

200

250

Qd

400

300

200

100

Qs

100

150

200

250

300

1.10 The demand for sunglasses is given by equation Qd = 1000 - 4P, where P
denotes the market price. The supply of sunglasses is given by equation Qs = 100 +
6P. Fill in the following table and find the equilibrium price.
P

80

90

100

110

120

Qd
Qs

Islamic University, Kushtia

SM Nahidul Islam
Dept. of Finance & Banking (2nd batch)
P

80

90

100

110

120

Qd

680

640

600

560

520

Qs

580

640

700

760

820

1.11 This years summer is expected to be very sunny. Hence the demand for
sunglasses increased and now is given by equation Qd = 1200 - 4P. How is the
equilibrium price going to change compared with the scenario described in
problem 1.7? Explain and then fill in the following table to verify your
explanation.
P

80

90

100

110

120

Qd
Qs

Answer: When the demand increases, more people are willing to buy sunglasses at the
equilibrium price. Hence, the supply is insufficient to satisfy the demand and the
equilibrium price has to go up. The table below confirms this.

80

90

100

110

120

Qd

880

840

800

760

720

Qs

580

640

700

760

820

S1
S2

P1

D1
Q1

Q2

D2
Q

Islamic University, Kushtia

SM Nahidul Islam
Dept. of Finance & Banking (2nd batch)
1.12 Suppose the supply curve for wool is given by Qs = P, where Qs is the
quantity offered for sale when the price is P. Also suppose the demand curve for
wool is given by Qd = 10 P + I , where Qd is the quantity of wool demanded
when the price is P and the level of income is I. Assume I is an exogenous
variable.
a) Suppose the level of income is I = 20. Graph the supply and demand
relationships, and indicate the equilibrium levels of price and quantity on your
graph.
b) Explain why the market for wool would not be in equilibrium if the price of
wool were 18.
c) Explain why the market for wool would not be in equilibrium if the price of
wool were 14.

Assuming

I 20

Qs P
we have

Q d 30 P
and

. Graphing these yields:

Islamic University, Kushtia

SM Nahidul Islam
Dept. of Finance & Banking (2nd batch)

Qs

Qd

30
25
20
P

15
10
5
0
0

10

15

20

25

30

The equilibrium occurs at

P 15 Q 15
,

Qs Qd
At a price of 18,
implying an excess supply of wool. Because sellers will not be
able to sell all of their wool at this price, they will need to reduce price to attract buyers.
At the lower price, the suppliers will offer a lower quantity of output for sale, and
consumers will want to purchase more.
Qd Qs
At a price of 14,
, implying an excess demand for wool. Buyers will begin to bid
up the price of wool until the new equilibrium is reached. At the higher price, the suppliers
will offer a higher quantity of output for sale, and consumers will want to purchase less.

Islamic University, Kushtia

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SM Nahidul Islam
Dept. of Finance & Banking (2nd batch)
1.13 Consider the market for wool described by the supply and demand
equations in Problem 1.12. Suppose income rises from I1 = 20 to I2 = 24.
a)
Using comparative statics analysis, find the impact of the change in income
on the equilibrium price of wool.
b)
Using comparative statics analysis, find the impact of the change in income
on the equilibrium quantity of wool.

I 1 20
With
of 15.

Qs P
, we had

I 2 24
With
yields

Q d 30 P
and

, which implied an equilibrium price

Qs P
, we have

Q d 34 P
and

Qs Qd
. Finding the point where

Qs Qd
P 34 P
2 P 34
P 17

Thus, a change in income of

I 4

yields a change in price of

P 2

Qs
Plugging the result from part a) into the equation for
reveals the new equilibrium
Q 17
I 4
quantity is
. Thus, a change in income of
yields a change in quantity of
Q 2
.
A major automobile manufacturer is considering how to allocate a $2 million
advertising budget between two types of television programs: NFL football
games and PGA tour professional golf tournaments. The following table shows
the new sports utility vehicles (SUVs) that are sold when a given amount of
money is spent on advertising during an NFL football game and a PGA tour golf
event.

Islamic University, Kushtia

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SM Nahidul Islam
Dept. of Finance & Banking (2nd batch)

The manufacturers goal is to allocate its $2 million advertising budget to

maximize the number of SUVs sold. Let F be the amount of money devoted to
advertising on NFL football games, G the amount of money spent on advertising
on PGA tour golf events, and C(F,G) the number of new vehicles sold.
a)

What is the objective function for this problem?

b)

What is the constraint?

c)

Write a statement of the constrained optimization problem.

d)
In light of the information in the table, how should the manufacturer
allocate its advertising budget?

a)

The objective function is the number of new SUVs sold, which we can denote by Q(F, G).

b)

The constraint is that total spending must be less than or equal to $2million, or TS
million.

c)

The constrained optimization problem is

$2

max Q F , G subject to TS F , G $2 million

F ,G

d)

The following table shows all possible combinations of spending on football games and
golf events:
(F, G)

New sales
from F

New sales
from G

Total new
sales

(0, 2)

(0.5, 1.5)

10

8
18
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SM Nahidul Islam
Dept. of Finance & Banking (2nd batch)
(1, 1)

15

21

(1.5, 0.5)

19

27

(2, 0)

20

20

The table indicates that new SUV sales are maximized when (F, G) = (1.5, 0.5), that is,
when the manufacturer spends $1.5 million on football and $0.5 million on golf.

The demand curve for peaches is given by the equation Qd = 100 4P,
where P is the price of peaches expressed in cents per pound and Qd is the
quantity of peaches demanded (expressed in thousands of bushels per
year). The supply curve for peaches is given by Qs = RP, where R is the
amount of rainfall (inches per month during the growing season) and Qs is
the quantity of peaches supplied (expressed in thousands of bushels per
year). Let P* denote the market equilibrium price and Q* denote the
market equilibrium quantity. Complete the following table showing how
the equilibrium quantity and price vary with the amount of rainfall. Verify
that when R = 1, the equilibrium price is 20 cents per pound and the
equilibrium quantity is 20,000 bushels per year.

Q*

20

P*

20

16

16.67

When R = 1, the equilibrium occurs where Qd = Qs, or 100 4P* = P*, or P* = 20. The
equilibrium quantity can be found from either supply or demand; using the latter we have Q* =
100 4(20) = 20. When R = 2, Qd = Qs implies 100 4P* = 2P* or P* = 16.67 and Q* = 33.33.
Similarly, we can fill out the rest of the table:
R

16

Q*

20

33.33

50

66.67

80

P*

20

16.67

12.5

8.33

Which of the following statements suggest a positive analysis and which a

normative analysis?

Islamic University, Kushtia

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SM Nahidul Islam
Dept. of Finance & Banking (2nd batch)
a)
If the United States lifts the prohibition on imports of Cuban cigars, the
price of cigars will fall.
b)

A freeze in Florida will lead to an increase in the price of orange juice.

c)
To provide revenues for public schools, taxes on alcohol, tobacco, and
gambling casinos should be raised instead of increasing income taxes.
d)
Telephone companies should be allowed to offer cable TV service as well as
telephone service.
e)
If telephone companies are allowed to offer cable TV service, the price of
both types of service will fall.
f)
Government subsidies to farmers are too high and should be phased out
over the next decade.
g)
If the tax on cigarettes is increased by 50 cents per pack, the equilibrium
price of cigarettes will rise by 30 cents per pack.

Positive analysis this statement indicates what the consequences of the U.S. action will
be, ignoring any value judgment when making the claim.
Positive analysis again this statement simply indicates the consequences of a change in
an exogenous variable on the market, ignoring any value judgments.
Normative analysis here the author implies that there are two possible solutions to
providing additional revenues for public schools and suggests, based on a value judgment,
which of the alternatives is better.
Normative analysis again the author makes a claim based upon his own value judgment,
namely that telephone companies offering cable TV service would be a good thing.
Positive analysis The author is making a positive statement. The author is predicting the
effect of a policy change on the price in a market.
Normative analysis here the author is making a prescriptive statement about what should
be done. This is a value judgment about the policy to subsidize farmers.
Positive analysis the author is making a prediction about what will happen if the tax on
cigarettes is increased. While the claim may not be accurate, the statement is predictive
and made without the author imposing any value judgments on the prediction.

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