Question

h) If the price of tomatoes increase how would you explain the change in demand for avocados with substitution and income effects? Explain in detail. 1) What is income elasticity of demand for avocado at the market clearing equilibrium price and quantity in Brooklyn avocado market? Explain. Also, based on your results explain what type of good tomatoes must be in Brooklyn. 1) Explain why as the price of avocado increases the demand for avocados becomes relatively more elastic? Also explain why as the price of avocado decreases the demand for avocados becomes relatively less elastic? k) What is the consumer surplus at the market clearing equilibrium price and quantity? Calculate and show it on a diagram 1) What is the producer surplus at the market clearing equilibrium price and quantity? Calculate and show it on a diagram. m) Suppose that in order to support the avocado producers and sellers the official local authorities in Brooklyn set the price of avocado at $5.50 per pound. Is this an example for price ceiling or price floor policy? Show how producer and consumer producer surplus would change with this intervention. Also calculate the total deadweight loss and show it on a diagram. n) Is this intervention a bad policy, implying a loss of economic efficiency? Discuss in detail. o) Now suppose that in order to support consumers the official local authorities in Brooklyn set the price of avocado at $4.00 per pound. Is this an example for price ceiling or price floor policy? Show how producer and consumer producer surplus would change with this intervention. Also calculate the total deadweight loss and show it on a diagram. p) Is this intervention a good policy, implying an increase of economic efficiency? Discuss in detail.

Answer 1

h) With the increase in price of tomatoes, the demand for Avocado increases.

Price Effect ------

Pt=$3,y=$3000 and let price of Avocado =$5

Qd= 54-12p+2pt+0•004y

Putting all values-----

54-12(5)+2(3)+0•004(3000)= 12 tons

Let price of tomatoes Pt increases from $3 to $4---

Qd= 54-12(5)+2(4)+0•004(3000)

= 14 tons

We find that ,demand for avocado Increases

Income effect-------

Let income of consumers rises from $ 3000 to $4000-------

54-12(5)+2(3)+0•004(4000)=16

With increase in income, demand for Avocado increases.

Substitution effect------ It is negetive because price effect = Income effect + substitution effect

2= 4- S.E,so, SE =-2

i) Income Elasticity of demand at the market clearing Equilibrium price -----

Market clearing price occurs where Qd=QS

54-12p+2pt+0•004y=12+6p-60pf

Putting all values given and We get------

54-12p+2(3)+0•004(3000)=12+6p-60(0•50)

P=$5

Putting value of p in demand equation----

We get Qd= 12 tons

So, at market Equilibrium ,----

Y=3000,Qd= 12 tons

When Y=$4000, Qd= 16 tons ( already caculated)

Income Elasticity of demand =∆Q/∆y×y/Q

4/1000 × 3000/12 = 1

Income Elasticity of demand for avocado is unitary at market clearing Equilibrium Point .

Tomatoes are a substitute good in Brooklyn.

J)price elasticity of demand for avocado is relatively more elastic whether the price increases or decreases.

For example,---

At p= 4, Qd= 24 tons

( 54-12(4)+2(3)+0•004(3000)=24)

When p=$5, Qd= 12

Ed= ∆Q/∆p×p/Q= 12/1× 4/24=2

Let p=$3

Ed= 12/1×4/24=2

K)&l)

Market clearing Equilibrium price =$5 per pound and Equilibrium quantity =12 tons

( CS) &(PS) at Equilibrium Point-----

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CS= 1/2(12)(6-5)=$6

PS= 1/2(12)(5-3)=$12

m)when price is set at $5•50 by govt, it is price floor

*CS= 1/2(6)(6-5•5)=$1•5

* PS=1/2(6)(5-3)=$6

DWL= 1/2(12-6)(5•5-4)=$4•5

n) This intervention is for the protection of producers so that they get minimum price for goods to sustain in the market.Though there is loss of welfare as demand at the price floor is less than supply and surplus) occurs .

o)when govt sets price at $ 4, it will be called price ceiling to protect consumers from overcharging by firms.

* CS= 1/2(6)(6-4)=$6

* PS= 1/2(6)(4-3)=$3

Dwl=1/2(6)(5•5-4)=$4•5

P) This policy is just for the consumers protection but at the price ceiling of $4, there is shortage of supply and excess demand , but the situation of Economic inefficiency sustains again.