SEMESTER SPRING 2013
MICROECONOMICS (ECO402)
ASSIGNMENT NO. 01
DUE DATE: 8TH MAY, 2013
MARKS: 20
ASSIGNMENT:
The Case:
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 this country. 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.
B. Calculate price elasticity of demand and price elasticity of supply when government decreases price of rice from Rs. 800 to Rs. 700.
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.
D. How cereal industry of Thailand will be affected if Government is successful in
overcoming hoarding of rice. Graphically analyze.
(Marks: Part A= 3 + Part B = 8 + Part C = 4 + Part D = 5)
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IDEA Solution
A. Calculate shortages or surpluses that occur in rice industry when government sets price equals to Rs. 700 per bag of rice.
Answer:
There will be a shortage of rice with 28000 Qtd. Ultimate effect price.
Part a (I):
Domestic industry for rice is in equilibrium where quantity demanded equals quantity supplied, i.e. Qd=QS.
By equating both equations, we get;
2000 – 6P = 1500 + 14P
-20P = -500
P = 500/20
P = Rs. 25
Part a (ii):
Qd = 2000 – 6P
Qd = 2000 – 6(25)
Qd = 2000-150
= 1850 kg
B. Calculate price elasticity of demand and price elasticity of supply when
Government decreases price of rice from Rs. 800 to Rs. 700.
Answer:
To calculate shortage, set the price ceiling price equal to the demand equation and equal to the supply equation and solve for Qd and Qs respectively. Subtracting Qs from Qd, you get the shortage. To calculate surplus, pick a market price for the consumer surplus calculation. Calculate the total units of the good purchased using this price according to your demand equation.
As price elasticity of demand = Percentage change in quantity demanded of rice/percentage change in price of rice
In this example,
Percentage change in quantity demanded of rice = (1910-1880)/1880*100
= 1.596
Percentage change in price of rice = (15-20)/20*100
= -25
Negative sign shows decrease in price of rice, so in absolute value, percentage change in price of rice = 25
Price elasticity of demand = 1.596/25
= 0.064
As consumers’ demand for rice is inelastic, so they will not increase consumption by significant amount when price of rice decreases from 20 to 15 per kg.
Therefore, consumers’ demand for rice does not increase significantly due to decrease in price.
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.
Answer:
As price elasticity of supply = Percentage change in quantity supplied of rice/percentage change in price of rice
In this example,
Percentage change in quantity supplied of rice = (1710-1780)/1780*100
= -3.933
Negative sign shows decrease in quantity supplied of rice, so in absolute value, percentage change in quantity supplied of rice = 3.933
Percentage change in price of rice = (15-20)/20*100
= -25
Negative sign shows decrease in price of rice, so in absolute value, percentage change in price of rice = 25
Price elasticity of supply = 3.933/25
= 0.157
As producers’ supply of rice is inelastic, so they will not decrease supply by more proportion when price of rice decreases from Rs.20 to Rs.15 per kg.
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)
