ECO402 Assignment Solution

I)

      

                                              Qd = 5000 –2P………eq no(i)

                                              Qs = 200 + 4P ………eq no (ii)

Equilibrium

                                                   Q_d=Q_s

                                                          5000 –2P =     200 + 4P

                                                      -2P-4P =   -5000+200

                                           -6P       =    -4800

                                              P       =    -4800/-6

                                              P       =      800

Now

By putting “P” value in eq no (i) to get “Q’s” value

                                               Q=5000-2(800)

                                               Q=5000-1600

                                                    Q=3400

Now

Price Elasticity of Demand:

                                    E_p    = P/Q* ΔQ_d/ ΔP

                                                =800/3400*(-2)

                                                =-0.470

Price Elasticity of Supply:        

                                    E_p       = P/Q* ΔQ_s/ ΔP

                                                = 800/3400*4

                                                =0.94

Answer ii)

As the price percentage change in the quantity demanded is less than the percentage change in price.

So

          An increase in demand for sugar affect price more than quantity

A Demand-Curve is drawn. P₁ is the first price of the sugar and Q₁ is the Quantity demanded along the demand-curve.

When the demand for sugar increases price caused decreased because of inverse relation between price and demand .As demand for sugar is price inelastic .So % Decrease in price caused by increase in % quantity demanded is less than 1.

Remember that E_p remains between 0 and 1 in case of Inelasticity.

Answer no iii)

.

                              Sugar Price   = P = 600Rs.

As given

                                              Qd = 5000 –2P………(i)

                                              Qs = 200 + 4P ………(ii)

Now

By putting “P” value in EQ.# (i) to get “Q’s” value

                                               Q=5000-2(600)

                                               Q=5000-1200

                                                    Q=3800

Now

Price Elasticity of Demand:

                                    E_p    = P/Q* ΔQ_d/ ΔP

                                                =600/3800*(-2)

                                                =-0.316

Price Elasticity of Supply:        

                                    E_p       = P/Q* ΔQ_s/ ΔP

                                                = 600/3800*4

                                                =0.632

As

     200 Rs. Decrease in Price cause Increase in Quantity demanded to increase by 200 per bag and supply to decrease that cause low production.