Question

A. If we examine the market for rice in Pakistan during the years 2007 and 2009, the demand for 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 a 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.

b. Why the government wants to keep the price at a higher level, i.e., to $5.50 when there is a decline in export demand. Will it affect the quantity demanded or quantity supplied equation and curve and how much?

c. Now with the help of a new quantity equation, calculate what should be the quantity of rice that the government must buy?

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 the last unit produced is 50, what will be the elasticity of demand for the product?