ECO402

Eco402 Assignment Solution:
If we examine the market for rice in Pakistan during the year 2007 and 2009, the demand of rice was higher in the year 2007 but it fell down during the year 2009, due to the drop in the export demand of rice. But the Government wants to keep the price of rice at higher level.
The given equations show the quantity demanded and quantity supplied of
rice during the year 2007.
Year 2007: Demand: Qd = 1,600 - 125P
Year 2007 Supply: Qs = 440 + 165P

a. Calculate the market clearing price level and quantity in the year
2007, in that year there were no effective limitations on the
production of rice.

Market clearing price condition
Quantity demanded = Quantity supplied
1600-125p = 440+165p
1600-440 = 165p+125p
1160 = 290p
P = 1160/290
Now: P = 4
Now putting values in the quantity demanded side or supply side
We are putting values in the quantity demanded side
Qd = 1600-125p
= 1600-125(4)
Qd = 1100
b. Why the government wants to keep the price at higher level i.e. to
$5.50 when there is decline in export demand. Will it effect on the
quantity demanded or quantity supplied equation and curve and how
much?

Yes it has effect on quantity demanded or quantity supplied.
Qd = 16, 00 – 125($5.50)
Qd =16, 00 – 687.5
Qd = 912.5

Quantity demanded is equal to Qd = 912.5

Qs = 440 +165($5.50)
Qs = 440 + 907.5
Qs= 1347.5
Quantity supplied is equal to Qs = 1347.5 Ans

c. Now with the help of new quantity equation calculate what should be
the quantity of rice which the government must buy?
Now
Excess supply = Qd –Qs
= 912 .5 -1345.7
= -435
The government will buy Q = 435
B.
Suppose a profit-maximizing monopolist is producing 800 units of output
and is charging a price of $70 per unit.
If the marginal cost of last unit produced is 50 what will be the elasticity of
demand for the product?
P = 70$ , MC = 50
P =MC/1+ (1/Ed) 70=50
We find “Ed”
P - MC = 1/Ed
70 – 50 = 1/Ed
20 = 1/Ed
Ed (20) = 1
Ed = 1/20

ECO402

Assignment No. 2
ECO-402
Micro Economics
Solution
Part “A”
(a)
Market clearing price condition
Quantity demanded = Quantity supplied
Qd = Qs
1600 -125p = 440 + 165p
1600 - 440 = 165p + 125p
1160 = 290p
P = 1160/290
P = 4
After putting the values of “P” in the quantity Demanded equation
Qd = 1600-125p
= 1600-125(4)
Qd = 1100
After putting the values of “P” in the quantity Supply equation
Qs = 440 + 165p
= 440 + 165(4)
Qs = 1100
(b)
P = 5.50
Qd = 1600-125p
= 1600-125(5.50)
Qd = 912. 5
Qs = 440+165p
= 440+165(5.50)
Qs = 1347.5
(c) Now
Excess supply = Qd –Qs
= 912 .5 -1345.7
= -435
(Q =435) This quantity Government will buy.
Part “B”
Lerner’s index of monopoly power
L = Mp
= P – Mc / P
We drive the formula for Ed from Lerner’s index.
- 1 / Ed = P-Mc / P
Multiply by – both sides
1 / Ed = Mc-P / P
Ed = P / Mc –P
Ed = 70/50-70
Ed = -3.5