ECO402 - Assignment No. 2 solution

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