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ECO402 - Assignment No. 2 solution

A.

If we examine the market for rice in Pakistan during the year 2007 and 2009, the demand of rice was higher in the year 2007 but it fell down during the year 2009, due to the drop in the export demand of rice. But the Government wants to keep the price of rice at higher level. The given equations show the quantity demanded and quantity supplied 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 and quantity in the year

2007, in that year there were no effective limitations on the

production of rice.

...........................................

Market clearing price condition

Quantity demanded = Quantity supplied

1600-125p = 440+165p

1600-440 = 165p+125p

1160 = 290p

P = 1160/290

Now: P = 4

Now putting values in the quantity demanded side or supply side

We are putting values in the quantity demanded side

Qd = 1600-125p

= 1600-125(4)

Qd = 1100

b. Why the government wants to keep the price at higher level i.e. to

$5.50 when there is decline in export demand. Will it effect on the

quantity demanded or quantity supplied equation and curve and how

much?

Yes it has effect on quantity demanded or quantity supplied.

Qd = 16, 00 – 125($5.50)

Qd =16, 00 – 687.5

Qd = 912.5

Quantity demanded is equal to Qd = 912.5

Qs = 440 +165($5.50)

Qs = 440 + 907.5

Qs= 1347.5

Quantity supplied is equal to Qs = 1347.5 Ans

c. Now with the help of new quantity equation calculate what should be

the quantity of rice which the government must buy?

Now

Excess supply = Qd –Qs

= 912 .5 -1345.7

= -435

The government will buy Q = 435

B.

Suppose a profit-maximizing monopolist is producing 800 units of output

and is charging a price of $70 per unit.

If the marginal cost of last unit produced is 50 what will be the elasticity of

demand for the product?

P = 70$ , MC = 50

P =MC/1+ (1/Ed) 70=50

We find “Ed”

P - MC = 1/Ed

70 – 50 = 1/Ed

20 = 1/Ed

Ed (20) = 1

Ed = 1/20

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