ECO401 Economics Assignment No.1 Solution Spring Semester 2013

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[SIZE="3"]ECO401 Economics Assignment No.1 Solution Spring Semester 2013[/SIZE]

The case:
The local sports goods manufacturing industry is one of the major source of foreign
exchange earnings of Pakistan. At present, there are more than 2000 units, mostly on
small scale in operation, with an installed capacity of Rs.20 billion per annum. The units
are operating on single-shift basis. Sports goods worth US$261.148 million were
exported in the year 2012. The industry enjoys a low markup rate of about 7% on loans
and has an easy access to the European and US markets. Let the demand and supply
functions of sports goods industry of Pakistan are:
Qd = 17000 –6P
Qs = 900 + 8P
However, due to increased competition by countries such as China, India and South
Korea the industry can no longer enjoy the profit; it did in the region earlier. These
countries might not have the seasoned labor of Sialkot but they can compete Pakistan
and meet any supply order on the basis of their research and development resources
and uninterrupted power supplies. But in Pakistan due to shortage of electricity, research
and development price of sports goods remained at very high level.
a. Find the equilibrium price and equilibrium quantity for the sports goods industry in
Pakistan. Also show the equilibrium condition graphically.
b. Find out the price elasticity of demand and price elasticity of supply of Sports
goods when the industry is in equilibrium and interpret the results.
c. What will be the effect on the equilibrium situation of sports goods industry if cost
of production of sports goods increases due to high per unit cost of electricity.
Illustrate graphically.
d. Suppose the Government takes initiatives to improve technology and provide
better infrastructure, what will be the impact of these initiatives on equilibrium
situation? Illustrate graphically.
(Marks: a: 2+2+3, b: 4+4, c: 2.5, d: 2.5)

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Idea Solution:

1).

Qd = Qs

17000 - 6P = 900+8P

8 P + 6 P = 17000 - 900

14 P = 16,100

P = 16,100/14 = 1150

Put Price into any 1 equation then we get quantity:

Qd = 17,000 - 6 P

= 17, 000 - 6 (1150)

= 17,000 - 6900

= 10, 100

Qs = 900 + 8 P

= 900 + 8 (1150)

= 900 + 9200

= 10 , 100