VU ECO402 Assignment No 01 Spring 2013

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)

IMPORTANT:

24 hours extra / grace period after the due date is usually available to overcome uploading difficulties. This extra time should only be used to meet the emergencies and above mentioned due dates should always be treated as final to avoid any inconvenience.

OTHER IMPORTANT INSTRUCTIONS:

 Make sure to upload the solution file before the due date on VULMS.
 Any submission made via email after the due date will not be accepted.

FORMATTING GUIDELINES:

 Use the font style “Times New Roman” or “Arial” and font size “12”.
 You may also compose your assignment in Open Office format.
 Use black and blue font colors only.

RULES FOR MARKING

 It is submitted after the due date.
 The file you uploaded does not open or is corrupt.
 It is in any format other than MS-Word or Open Office; e.g. Excel, PowerPoint, PDF etc.
 It is cheated or copied from other students, internet, books, journals etc.

Dear students!
As you know that Pre Mid-Term semester activities have started and load shedding problem is also prevailing in our country. Keeping in view the fact, you all are advised to post your activities
as early as possible without waiting for the due date. For your convenience; activity schedule has already been uploaded on VULMS for the current semester, therefore no excuse will be
entertained after due date of assignments, quizzes or GDBs.

IDEA Solution

A. Calculate shortages or surpluses that occur in rice industry when government sets price equals to Rs. 700 per bag of rice.

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.

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.

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)