Question

Maize is a product produced in a district called Adwensa. Producers in the area are able to

switch back and forth between maize and wheat production depending on market conditions.

As a result the producers of contracted an economist to estimate the supply function for the

producers using data from 30 producers:

�!

" = −124 + 5.0�! − 2.5�# + 1.2� + 0.5�!

Where �!

" is the quantity supplied of maize in bags, �! is the average price of maize (¢ per

bag), �$ is the per unit price of capital, R is the amount of rainfall (in inches) and �! is the level

of technology. In addition, the economist also estimated the demand function for maize as

follows using data from 22 market centres in the district:

�!

% = −120 − 3.0�! + 1.25�& + 0.02� + 0.5�

Where �!

% is the quantity demanded of maize in bags, �! is the average price of maize (¢ per

bag), �& is the average price of wheat (¢ per bag), M is per capita income and A is the amount

of money spent on advertising.

Now suppose the equilibrium values of the variables in the demand and supply functions are

given as:

�! = ¢4; �& = ¢40; � = ¢7500; � = ¢20; �# = ¢8; �! = 100; ��� � = 20 ���ℎ��

i. Estimate the demand and supply curves for maize

ii. Determine the equilibrium price and quantity for maize.

iii. Sketch the demand and supply curves and examine the welfares of the

economic agents and hence find the total welfare of the society.

iv. Suppose the government imposes a tax of GH¢5 on every bag of maize sold,

determine the new equilibrium price and quantity.

v. How would the producers and consumers share the tax per unit?

vi. What is the government tax revenue?

vii. Represent the demand curve, old and new supply curves and estimate the deadweight

loss from tax.

viii. What type of good is maize?

ix. What is the relationship between maize and wheat?