Question

1. Assume that the (weekly) market demand and supply of tomatoes are given by the following figures: Price (E per kilo) 4.00 3.50 3.00 2.50 2.00 1.50 1.00 Qc000 kilos) 30 35 40 45 50 55 60 0.0000 kilos) 8068 6255 50 45 38 (a) What are the equilibrium price and quantity? (b) What will be the effect of the government fixing a minimum price of (i) £3 per kilo; (ii) £1.50 per kilo? (c) Alternatively, suppose that the government guaranteed tomato producers a price of £2.50 per kilo. (i) How many tomatoes would it have to buy in order to ensure that all the tomatoes produced were sold? (ii) How much would this cost the government? (d) Alternatively, suppose it bought all the tomatoes produced at £2.50. (i) At what single price would it have to sell them in order to dispose of the lot? (ii) What would be the net cost of this action? 2. Think of some examples where the price of a good or service is kept below the equilibrium. In each case consider the advantages and disadvantages of the policy. 3.In most countries in South America, the legal driving age is 18. If the legal driving age in the United States was raised from 16 to 18, how would this affect the market for new and used automobiles? What would happen to the equilibrium price and quantity of new and used automobiles?

Answer 1

According to HOMEWORKLIB POLICY, I would only be solving the first four parts.

1. a) At equilibrium quantity: Q_d=Q_s=50

At this quantity, the price of the product is 2.00.

Hence the equilibrium quantity is 50 and equilibrium price is 2.00

b) i. When the government fixes a minimum price of 3 per kilo, the quantity demanded would be 40 and quantity supplied would be 62. In such a situation, the quantity demanded is less than the quantity supplied resulting in excess supply in the market.

ii. When the government fixes a minimum price of 1.50 per kilo, the quantity demanded would be 55 and quantity supplied would be 45. In such a situation, the quantity demanded is higher than the quantity supplied resulting in excess demand in the market.

c) i. When the government fixes the price at 2.50, the quantity demanded is 45 and quantity supplied is 55. There is an excess supply in the market and the government would have to purchase the leftover quantity.

55-45=10

Hence, the government would have to buy 10,000 kilos of tomatoes to reach equilibrium in the market.

ii. Cost to the government= 10,000*2.50= 25,000

d) Total amount spent on buying tomatoes= 2.50*total supply= 2.50*55000= 137500

In order to create a net demand for 55,000 kilos of tomatoes, the government will have to price it at 1.50

Total revenue to the government= 1.50*55000= 82,500

Net cost to the Government= 137500-82500= 55,000