ECO402 Microeconomics Assignment 1 Solution Spring 2014

The Case:
Pakistan is a large potato producing country. Over the years, potato has become an important crop for both farmers and consumers in Pakistan. It is the fourth most important crop by volume of production.Potatoes were being sold at Rs.30 per kilogram in the vegetables market a few months ago. The quantity demanded and quantity supplied for potatoes were:

Qd = 1000 – 2P
Qs = 850 + 3P

The price has hiked by Rs.45 per kilogram in past three weeks and they are being sold at Rs.60 per kilogram these days. The main reason behind the high price of potatoes is that the profiteering mafia has hoarded huge quantity of this important vegetable. Their aim is to attain higher profits by selling them at higher prices in the upcoming month of Ramazan. It has been reported that hoarders have stored them in different godowns at Bhara Kahu, Chak Shahzad, Pirwadhai, Golra, Ganjmandi, Sihala, Khanna Dak and Dhoke Ratta. Government has taken immediate action against hoarders, and finance minister, Ishaq Dar, has given a 72-hours deadline to dealers to bring down the price of potatoes to Rs.30 per kilogram in retail markets. The potato farmers have denied any involvement in hoarding and claimed that the rise in prices of potatoes is due to increased prices of inputs. Government’s ultimatum to reduce the price of potatoes in the markets has fallen on deaf ears as the traders are still selling potatoes at high prices in retail markets.

Requirements:
A. Find the equilibrium price and quantity for potatoes.

Solution:

Qd=1000-2p                                      = Qs =850+3p

1000-850                                          =    3p+2p

150                                                  = 5p

p = 150/5 =30

qd= 1000-2(30)                                  = Qs =850 +3(30)

qd= 1000-60                                      = Qs= 850 +90

qd = 940                                           = qs= 940

equilibrium price is 30

n equilibrium quantity is 940

B. If P = Rs.60 then how much amount of shortage or surplus would occur?
C. How would the increased prices of inputs have affected the market of potatoes? Illustrate graphically.
D. If the potato farmers’ claim regarding rise in prices is justified, then what should be the possible strategy by the government? Discuss.