Solution:
Part A
Solution of question(a):
Domestic industry for MP3 players is in equilibrium where quantity demanded
equals quantity supplied, i.e. Qd=QS.
By equating both equations, we get;
1900 – 7P = 1300 + 17P
17P + 7P = 1900 – 1300
24P = 600
P = 600/24
P = 25
Solution of question(b):
At price 20, quantity of MP3 players demanded by consumers is;
Qd = 1900- 7(20)
= 1760 units
When price decreases to RS.10, quantity demanded of MP3 is;
Qd = 1900- 7(10)
= 1830 units.
Price elasticity of demand (Ep) is calculated by using following formula;
E p = [change in Quantity demanded / change in Price]* Price/quantity
Now price elasticity of demand is calculated by putting values in above formula;
E p = (70/10)* 10/1830
= 0.039
Price elasticity of demand in this case is less than 1 which shows that percentage
change in quantity demanded of MP3 players is less than percentage change in
price.
Part B:
Solution of question(a):
:
Industry of MP3 players in Japan
Solution of question(b):
Japanese government should take following actions to promote domestic MP3
players industry;
Tariff rates on import of MP3 players should be increased. As a
result, price of imported MP3 players will increase which in turn
leads to a significant decline in its demand.
Government can give subsidy to domestic suppliers to decrease
price of local MP3 players.
Government can also provide incentives to suppliers in order to
increase quality of MP3 players.
Import quotas system can be used by government to save
domestic industries.
Supply curve
(S)
Demand curve
(D)
New supply curve (S
’
)
Quantity Demanded (Qd) /
Quantity Supplied (Qs)
Price
(P)
X-axis
Y-axis
P1
P 2
Q1
Q2