ECO402 Microeconomics Assignment No.2 Solution Spring Semester 2013

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ECO402 Microeconomics Assignment No.2 Solution Spring Semester 2013


ASSIGNMENT:
The Case:
Thailand is the world second largest exporter of rice. Rice production in Thailand
represents a significant portion of the labor force of Thailand’s economy. It is a necessity
good for the people of this country. It is also used in the production of cereals and
biofuels. Domestic rice industry is providing finest varieties of rice to the people of this
country. Suppose, in year 2011, price of rice increased sharply which badly affected the
whole economy. Thailand’s government conducted survey to find out the reason of
sharp increase in price. As per findings of the survey, some major domestic suppliers
were found to be involved in the practice of hoarding of rice. This practice raised price of
rice in domestic market. To cope with this situation, government implemented two major
decisions. First, it set the price of rice equal to Rs. 700 per bag in July, 2011. Secondly,
heavy fine was announced to be imposed if any producer was found to be involved in
hoarding of rice. These decisions affected all producers of rice. Data on price, quantity
demanded and quantity supplied of rice in different months of year 2011 are given
below:
Months Price per bag of rice
(in Rs.)
Quantity
Demanded of rice
(Bags of rice)
Quantity supplied
of rice (Bags of
rice)
January 600 78,000 47,000
April 800 75,000 60,000
July 700 77,000 49,000
Requirements:
Being a student of economics, you are required to analyze domestic industries of rice
and its related products in above situation by answering the following questions;
A. Calculate shortages or surpluses that occur in rice industry when government
sets price equals to Rs. 700 per bag of rice.
B. Calculate price elasticity of demand and price elasticity of supply when
government decreases price of rice from Rs. 800 to Rs. 700.
C. Analyze whether the above government action in the form of setting price equals
to Rs.700 per bag is proved to be successful to stable the domestic rice market
or not. Give answer by only considering the values calculated in part B.
D. How cereal industry of Thailand will be affected if Government is successful in
overcoming hoarding of rice. Graphically analyze.
(Marks: Part A= 3 + Part B = 8 + Part C = 4 + Part D = 5)