Question

a) In order to stimulate local poultry production, the Namibian government through the Ministry of Agriculture, Water and Land Reform (MAWLR) passes a law requiring suppliers of imported Chicken products to pay a N$0.5 (50 cent) tax on each kilogram of Chicken products they import. Before tax, the price suppliers receive is N$3.00 and the quantity they imported is 100kg of chicken products. The introduction of tax will reduce the quantity imported by 10%, the price sellers receive by 6.67% and increase the price buyers pay by 9.1%. i) Draw a supply-and-demand diagram of the market for chicken products without the tax. Show the price paid by consumers, the price received by producers, and the quantity of chicken products sold. What is the difference between the price paid by consumers and the price received by producers? (6)
ii) Now draw a supply-and-demand diagram for the chicken product market with the tax. Show the price paid by consumers, the price received by producers, and the quantity of chicken products sold. What is the difference between the price paid by consumers and the price received by producers? Has the quantity of chicken products sold increased or decreased? (6)
b) The Namibian government through the Ministry of Agriculture, Water and Land Reform (MAWLR) has decided that the agricultural freemarket price of milk is too low. Supposed the government imposes a binding N$4 price floor in the milk market above the equilibrium price of N$3. The price floor will increase the quantity supplied with 36% and reduces the quantity demanded by 6.25%. The equilibrium quantity is 80 Litres
i) Suppose the government imposes a binding price floor in the milk market. Draw a supply-and-demand diagram to show the effect of this policy on the price of milk and the quantity of milk sold. Is there a shortage or surplus of milk? (6)
ii) Dairy farmers complain that the price floor has reduced their total revenue. Is this possible? (2)
iii) In response to farmers’ complaints, the government agrees to purchase all the surplus milk at the price floor. Compared to the basic price floor, who benefits from this new policy? Who loses?   

Answer 1

Sol (A)

(i) Supply and Demand before Tax on imports is at point where amrket is at equilibirum corresponding to the equilibrium Price ($3) and Equilibrium Quantity ( 100 Kg).

Price Paid by the Consumer is $3 and Price Recieved by the Supplier is $3 , OS there is no difference between the prices recieved by the seller and paid by the consumer.

(ii) Supply and Demand after Tax on imports is at point where Supply is 90 Kg ( 10% decreases in 100 kg) and Price Paid by the Consumer is $3.27 ( 9.1 % increase in prices because of tax) and Price Recieved by the Supplier is $2.8 (because, of tax , there is 6.67% reduction in prices recieved by the supplier) and there is difference between the prices recieved by the seller and paid by the consumer. i.e ($3.27 - $2.8 = $0.47 )