Name: Ahmed Samir Hammoud

Class: SH1 (AAST)

Date: 10 March 2023

AAST MBA – Managerial Economics Final Exam

Question 1: (10 Marks)

Assume there is a well-defined geographic area of a city. The area is

composed exclusively of apartments and is populated by low-income
residents. The people who live in the area tend to stay in that area
because (1) they cannot afford to live in other areas of the city, (2)
they prefer to live with people of their own ethnic group, or (3) there
is discrimination against them in other areas of the city

(1) Would the demand for apartments in this area be relatively inelastic or
relatively elastic? State why.

(2) Would the supply of apartments in this area be relatively inelastic or

relatively elastic? State why.

(3) Draw the demand and supply curves as you have described them, showing
the initial equilibrium price and quantity.
Solution of Q1:

(1) Such an area of apartments has a demand relatively inelastic because the
residents are already paying a high-income proportion as rent and are subject
to discrimination. Since there are higher prices in other areas, they will
choose to stay in this area. Therefore, a percentage change in price would
result in to lower change in demand because people would not prefer to leave
the area and there will always be other people ready to fill.

(2) Such an area will have a relatively inelastic supply because the area is
composed of low-income residents. The supplies know that the residents of
this region will not go anywhere else since they can't afford it as they are
already paying a huge proportion of their income as rent. Consequently, a
change in price won't affect the supplied quantity much.

(3) Since no specific values are given, the supply and demand curves shall look
like standard supply and demand curves which would be a little towards being
vertical with standard equilibrium price and quantity.

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 Question 2 (10 Marks)

Select and name a market of any well-known product (left upon your
imagination), draw its market diagram, and state and name four
different factors that might cause changes, showing the changes in
equilibrium price and quantity.

Solution Of Q2:

The eyeglasses market is a perfectly competitive market with a large number of buyers
and sellers selling similar products, all of whom initiate the buying and selling
mechanism. There are no entry barriers, perfect information, and no direct competition
in the market, and sellers are price takers. Many factors influence supply and demand,
causing equilibrium prices and quantities to change in the branded and unbranded
eyeglasses market.
The following are the four factors that could affect the product's equilibrium price and
quantity:

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1- Changes in the consumer's level of income:
As consumer income rises, they will likely purchase more products from branded
retailers as opposed to unbranded retailers, causing the demand curve for
branded eyeglasses to shift to the right and the equilibrium price and quantity to
increase as well, as shown in diagram 1.

2- Changes in consumer tastes and preferences:

As unbranded eyeglasses start to use new technology to create distinctive
categories of reasonably good quality, the demand for branded eyeglasses will
decline and the supply of unbranded eyeglasses will rise. As a result, the
equilibrium price will decline, but the equilibrium quantity will be uncertain.

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3- The number of suppliers:
Due to the proliferation of branded eyeglasses and the proliferation of suppliers
offering nearly identical quality, the supply has increased and the original supply
curve has been shifted to the right. As a result, the equilibrium price has
decreased and the equilibrium quantity demanded has increased along the
demand curve, as shown in diagram 3.

4- Expected Future Prices:

This factor directly affects the supply of branded eyeglasses because those
stores anticipate higher prices as a result of new import and export regulations.
As a result, the supply will decline for the time being and shift the supply curve to
the left, which will cause the equilibrium price to increase and the equilibrium
quantities to decrease, as shown in Diagram 4.

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 Question 3 (20 Marks)

"The International Monetary Fund has put some conditions to

address Monetary, Fiscal and Structural problems that faced the
Egyptian economy."
Discuss the last sentence, addressing the main problems in the Egyptian
economy, and Egypt’s Compliance with the conditions, under IMF
extended Fund Facilities.

Solution Of Q3:

1)Exchange rate flexibility and its importance for Egypt:

In the past, a heavily managed exchange rate has not served Egypt well. It has led to
periods of building imbalances, which in turn, have led to the loss of central and
commercial bank foreign currency assets, and rationing of foreign currency, forcing the
central bank to abruptly devalue the Egyptian pound relative to other currencies. These
devaluations have led to spikes in inflation and undermined economic activity as
consumers and investors lose confidence in the health of the Egyptian economy.

The objective of policies under the Fund-supported program is, therefore, for the value
of the Egyptian pound to be determined freely against other currencies (i.e., establish a
flexible exchange rate), which would avoid the build-up of chronic imbalances in the
demand for and supply of foreign currency in Egypt and preserve the FX reserves of the
central bank. Under this framework, one would observe two-way movements in the
exchange rate, as it appreciates or depreciates in line with economic conditions.
Flexibility in the exchange rate would bring several benefits. It would help Egypt’s
domestic economy adjust more smoothly to external shocks, support the ability of
Egyptian businesses to sell their goods and services abroad, and encourage greater
investment by reducing the likelihood of large abrupt changes in the exchange rate. In
addition, it would help preserve the financial buffers of the central bank.

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2) Filling the large external financing gap that Egypt faces :
The external financing gap represents the difference between the projected demand for
and supply of foreign currency financing, including the demand for foreign currency to
rebuild the foreign reserves of the central bank. IMF financial support under the program
will fill part of the financing gap. In addition, an important objective of IMF-supported
programs is to catalyze broader financial support from international and bilateral
partners, as well as private sector investors. While conditions in private international
financial markets are difficult at this juncture for a large cross-section of emerging
markets, Egypt included, there is sufficient international and regional financial support
for the program. Importantly, Egypt has secured new financing of around $5 billion in
FY2022/23 (the first fiscal year of the program), of which $2 billion will be generated
through the sale of equity in public sector companies, including as part of the
authorities’ privatization strategy, executed by the Sovereign Fund of Egypt (SFE).
These will be in addition to the rollover of GCC deposits at the central bank. The
remaining $3 billion will come from multilateral support.

3) The program protects Egypt's vulnerable households:

Safeguarding macroeconomic stability and fighting inflation is key to ensuring prosperity

for all Egyptians, in particular the most vulnerable. In this regard, monetary policy under
the program will be focused on fighting inflation and the erosion of purchasing power
that is disproportionately affecting poor and middle-class families. In addition, the
authorities plan to expand social spending under the program to help the most
vulnerable.

A number of measures are planned, including:

A. coverage of the Takaful and Karama cash transfer program will be extended to
an additional 5 million households.
B. The rollouts of the universal health insurance scheme and the COVID-19
vaccination program will continue.
C. Emergency support to rationing card holders and measures to protect the
purchasing power of vulnerable wage earners and pensioners will be extended.
D. The planned expansion of the social registry will enable the authorities to
strengthen the targeting of social protection schemes.

4) Measures in the program that support the development of the private sector:

Encouragingly, there is an ongoing debate in Egypt about the role of the state in the
economy. Structural reform policies under the program will support the authority’s plan
to reduce the state footprint, enhance transparency and governance of state-owned
enterprises (SOEs), level the playing field for all economic agents (e.g., through the
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removal of preferential treatment for SOEs), and improve trade facilitation. The State
Ownership policy—with the primary objective of establishing a clear framework that
regulates the relationship between the state and the private sector across various
economic activities is a critical first step down this reform path. This and other structural
reforms, such as strengthening competition policy and improving trade-related
processes, will strengthen the ability of the private sector to better contribute to
economic growth in Egypt and help create economic opportunities for Egypt’s large and
fast-growing working-age population.

5) IMF promote greater transparency over policies in Egypt :

The IMF-supported program has a number of measures to promote greater fiscal

transparency. Transparency helps governments obtain an accurate picture of their
finances when making economic decisions, including the costs and benefits of policy
changes and potential risks to public finances. It also provides legislatures, markets,
and the public with the information they need to hold governments accountable. Greater
fiscal transparency can also help strengthen the credibility of a country’s fiscal plans
and can help underpin market confidence and market perceptions of fiscal solvency.
The authorities have committed to a significant number of concrete measures in this
area, including:

A. All SOEs will be required to submit financial accounts to the Ministry of Finance
(MOF) on a biannual basis, and the MOF will ensure open access to these data,
along with information on the subsidies to the SOEs.

B. Publication of audit reports on fiscal accounts by the Central Auditing

Organization (CAO).

C. Publication of all procurement contracts that exceed EGP 20 million on the

procurement portal website.

D. Publication of a comprehensive annual report on tax breaks, exemptions, and

incentives.

E. Publication of reports on payment arrears by the MOF.

F. Publication of the monthly budget outturns within 60 days after the end of the
reporting month.

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