. A..If we examine the market for rice in Pakistan during theyear 2007 and 2009,
ID: 1239334 • Letter: #
Question
.A..If we examine the market for rice in Pakistan during theyear 2007 and 2009,
the demand of rice was higher in the year 2007 but it fell downduring the
year 2009, due to the drop in the export demand of rice. Butthe
Government wants to keep the price of rice at higher level.
The given equations show the quantity demanded and quantitysupplied of
rice during the year 2007.
Year 2007: Demand: Qd = 1,600 - 125P
Year 2007 Supply: Qs = 440 + 165P
a. Calculate the market clearing price level andquantity in the year
2007, in that year there were no effective limitations on the
production of rice.
b. Why the government wants to keep the price athigher level i.e. to
$5.50 when there is decline in export demand. Will it effect onthe
quantity demanded or quantity supplied equation and curve andhow
much?
c. Now with the help of new quantity equationcalculate what should be
the quantity of rice which the government must buy?
B.Suppose a profit-maximizing monopolist is producing 800units of output
and is charging a price of $70 per unit.
If the marginal cost of last unit produced is 50 what will be theelasticity of
demand for the product?
Explanation / Answer
Answer (A) (a):
We know that in equilibrium Qd = Qs
So, 1,600 – 125P = 440 + 165P
1,600 = 440 + 165P + 125P
1,600 – 440 = 165P + 125P
1,160 = 290P
P = 1,160 / 290
P = $4 is market clearing price.
By putting this price either in Qd equation or Qs equation wewill get equilibrium quantity as shown below:
Qd = 1,600 – 125P
Qd = 1,600 – 125(4)
Qd = 1,600 – 500
Qd = 1,100 units
Qs = 440 + 165P
Qs = 440 + 165(4)
Qs = 440 + 660
Qs = 1,100 units
Answer (A) (b):
The government increases the price level to make the surplus inthe market, so by setting higher price level, supplier willincrease the supply of rice, and at the higher price level, demandwill be decreased.
Effect of higher price P = $5.5 on quantity supplied andquantity demanded equation:
Qd = 1,600 – 125P
Qd = 1,600 – 125(5.5)
Qd = 1,600 – 687.5
Qd = 912.5 units reduced from 1,100 units due to higherprice.
Qs = 440 + 165P
Qs = 440 + 165(5.5)
Qs = 440 + 907.5
Qs = 1,347.5 units increased from 1,100 units due tohigher price.
Answer (A) (c):
Government purchases = Excess Supply due to higher price
Excess Supply = Qs units – Qd units
Excess Supply = 1,347.5 – 912.5
Excess Supply = 435 units should be purchased bygovernment.
Answer (B):
We know that;
(p / MC) = (1 / (1 - (1/E)))
(70 / 50) = (1 / (1 - (1/E)))
1.4 = (1 / (1 - (1/E)))
(1 - (1/E)) = (1 / 1.4)
(1 - (1/E)) = (0.71428571)
(1/E) = 1 - 0.71428571
(1/E) = 0.28571429
E = 1 / 0.28571429
E = 3.4999 or 3.5 it is greater than it means it is anelastic good.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.