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ECO402 Microeconomics Assignment 1 Solution Spring 2013

Thailand is the world second largest exporter of rice. Rice production in Thailand represents a significant portion of the labor force of Thailand’s economy. It is a necessity good for the people of this country. It is also used in the production of cereals and biofuels. Domestic rice industry is providing finest varieties of rice to the people of thiscountry. Suppose, in year 2011, price of rice increased sharply which badly affected the whole economy. Thailand’s government conducted survey to find out the reason of sharp increase in price. As per findings of the survey, some major domestic suppliers were found to be involved in the practice of hoarding of rice. This practice raised price of rice in domestic market. To cope with this situation, government implemented two major decisions. First, it set the price of rice equal to Rs. 700 per bag in July, 2011. Secondly, heavy fine was announced to be imposed if any producer was found to be involved in hoarding of rice. These decisions affected all producers of rice. Data on price, quantity demanded and quantity supplied of rice in different months of year 2011 are given below:
Months Price per bag of rice (in Rs.) Quantity Demanded of rice(Bags of rice) Quantity supplied of rice (Bags of rice)
January 600 78,000 47,000
April 800 75,000 60,000
July 700 77,000 49,000
Requirements:
Being a student of economics, you are required to analyze domestic industries of rice and its related products in above situation by answering the following questions;
A. Calculate shortages or surpluses that occur in rice industry when government sets price equals to Rs. 700 per bag of rice.

Soltuion:

There will be a shortage of rice with 28000 Qtd. Ultimate effect price
B. Calculate price elasticity of demand and price elasticity of supply when government decreases price of rice from Rs. 800 to Rs. 700.

Solution:

P Ed = dQ/dP * P/Q

= -2000/-100 * 800/75000

= 0.21

P Es = dQ/dP * P/Q

= -11000/-100 * 800/60000

= 1.47
C. Analyze whether the above government action in the form of setting price equals to Rs.700 per bag is proved to be successful to stable the domestic rice market or not. Give answer by only considering the values calculated in part B.

Solution:

If PED = 0.21: If the PED is less than one, the good is inelastic. …

If PES = 1.47: When PES is grater than 1 then supply is price elastic…


D. How cereal industry of Thailand will be affected if Government is successful in overcoming hoarding of rice. Graphically analyze.

If rice is not used in befoul then demand of rice in international market will be decreased and supply of
rice will increase in domestic market so supply curve will shift rightward. That’s why equilibrium
quantity of rice will be increased in domestic market and its price will be decreased as shown in the
following diagram.
Demand Curve (D)
Supply (S)
Supply(S’)
Price (P)
P2 (1910) D
P1 (1880)
0 Q2 (1710) Q1 (1780)
Quantity (Q)
Quantity Demand (QD)/Quantity Supply (QS)

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