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ECO402 Microeconomics Assignment 1 Solution Fall 2012

The Case:
Agriculture is the backbone of a number of economies, like Pakistan, India, China and others. The expansion of fertilizer’s production, mechanization and pesticides is considered as a significant factor to enhance the growth of agricultural sector in these countries. Here we will take the case of Pakistan.
Pakistan is a major exporter of rice and cotton. Suppose Pakistan is expecting bumper rice, cotton and sugarcane crops this year. By far, this situation will fluctuate price, demand and supply of these commodities in domestic and international market.
Hypothetical data of quantity supplied (Qs) and quantity demanded (Qd) of rice in domestic market and international market for two years is given
below.
  2010                                                          2011 
    Price          Qd                  Qs                 Price         Qd            Qs

(per kg)      (per kg)        (per kg)            (per kg)    (per kg)    (per kg)

Domestic market              20         1880              1780                  15            1910       1710
International market          21         4000              3450                  17            4050       7100

 

In the international market, the demand for rice is increasing day by day because of two main reasons, firstly population of the world is growing with 1.7% per year; secondly it is used as biofuel. The demand and supply equations of rice in domestic market are Qd = 2000- 6P and Qs = 1500 + 14P respectively. With the help of above data, solve questions given below.
Requirements:
a) Find the equilibrium price and equilibrium quantity of rice in domestic market.

b) How much quantity demanded of rice will be affected as a result of decrease in price of rice from Rs.20 to Rs.15 per kg in the domestic market? (Give your answer after calculating price elasticity of demand)

c) How much quantity supplied of rice will be affected as a result of decrease in price of rice from Rs.20 to Rs.15 per kg in the domestic market? (Give your answer after calculating price elasticity of supply)

d) If rice is not used in biofuel, how would this situation affect the price and quantity sold of rice in domestic market? Indicate graphically.                                                              (Marks = 5+5+5+5)

Solution:

The Equilibrium Principle state that A market in equilibrium leaves no unexploited opportunity for individuals, but may not exploit all gains achievable through collective action.

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