Question

1. Assume that the (weekly) market demand and supply of tomatoes are given by the following figures: Price (£ per kilo) 4.00 3.50 3.00 2.50 2.00 1.50 1.00 Qa (000 kilos) 30 35 40 45 50 55 60 Q. (000 kilos) 80 68 62 55 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

Answer 1a

At Equilibrium, Quantity Demanded= Quantity Supplied which is happening at Price level of 2

Hence Equilibrium Price = 2, Equilibrium Quantity = 50

Answer 1b

If minimum Price of 3 is fixed then Quantity demanded is 40 while quantity supplied is 62 Hence there will be an Excess Supply of 62-40= 22

If minimum Price of 1.5 is fixed then Quantity demanded is 55 while quantity supplied is 45 Hence there will be an Shortage Supply of 55-45= 10

Answer 1c

If Guaranteed Price is 2.5 then Quantity demanded is 45 while quantity supplied is 55 Hence there will be an Excess Supply of 55-45= 10

Hence Government will have to buy 10000 kilos

Cost will be 10000*2.5 = 25000 pounds

Answer 1d

At 2.5 quantity supplied is 55, hence government will buy 55000 kilos to dispose of 55000 kilos price should be 1.5.

Net cost of the action= 55000*(2.5-1.5) = 55000 pounds