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ECO401 Assignment 1 Solution Spring 2018

The Case:
Agriculture is an important sector of Pakistan’s economy. This sector directly
supports the country’s population and accounts for 26 percent of gross domestic
product (GDP). The major agricultural crops include cotton, wheat, rice,
sugarcane, fruits and vegetables. The annual sugarcane output has averaged
around 74m tones in the last four years, according to the economic survey. As a
result, the average production of sugar between 2013-14 and 2016-17 remained
well above 5.7m tones. Further, the average wheat output has remained above
25.6m tones in the last four years compared to generously estimated national
average consumption of 24m tones, according to the economic survey of
Pakistan. Suppose the wheat and sugarcane is facing the following demand
functions:
Demand function for wheat crop:
Demand function for sugarcane crop:
Requirements:
1.
Calculate price elasticity of demand of agricultural products using point
elasticity method for wheat crop and sugarcane crop in the following
cases:
a. If market price of wheat is Rs.1300 per ton.
b. If market price of sugarcane is Rs. 180 per ton.
(Note: You are required to use given demand function and market price for
calculation of price elasticity of demand of each product)

Solution : 

  1. If market price of wheat is Rs.1300 per ton.

Solution:

Qd=15000-30P+ P2

Qd=1500-30(1300) + (13002)

Qd=15000-39000+ 1690000

Qd=1666000

Dq/ Dp     =-30 +2P

Dq/ Dp     =-30+2p

Dq/ Dp     =-30+2(1300)

Dq/ Dp      =2570

The formula of elasticity = (Dq/Dp) (P/Q)

= (2570) (1300/1666000)

=2.01

  1. If market price of sugarcane is Rs. 180 per ton.

Qd=12000-20P+2P2

Qd=12000-20(180)+2(180)2

Qd=12000-3600+64800

Qd=7320

Dq/ Dp=-20+4P

Dq/ Dp  =-20+4(180)

Dq/ Dp    =-20+720

Dq/ Dp    =700

The formula of elasticity = (Dq/Dp) (P/Q)

=    700(180/7320)

=     1.72


2. Suppose government gives subsidy to the producers of agricultural sector,
explain with reason how it will impact the supply and price of the
agricultural products in domestic market. (Graph is not required)

Solution :

RATIONING & SUPPLY SHOCKS (ALTERATION OF EQUILIBRIUM PRICE BY THE GOVT) There are two ways for this: 1. Through Tax : Tax (to be paid by the producer) will increase the Supply Price, Supply Curve shifts left ward, Price increases & quantity decreases. 2. Through Subsidy : Subsidy (given to the producer) will decrease the Supply Price, Supply Curve shifts rightward, Price decreases & quantity increases .

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