Question

Question 3 You are the manager of Zokia Ghana Limited, a producer of beans. In Ghana, it is possible to produce beans or groundnut using the same resources. Therefore, producers are able to switch from beans to groundnut production depending on market conditions. Consequently, Zokia Ghana Limited consulted an Economist who estimated the demand function for beans as: ?? ? = 600 − 4?? − 0.03? − 12? ? + 15? + 6?? + 1.5? where ?? ? is the quantity demanded of beans each month (in bags), ?? is the average price of beans (in GH¢), M is the average household income (in GH¢), ? ? is the price of groundnut (in GH¢), T is a consumer taste index ranging in value from 0 to 10 (the highest rating), ? ? is the price (in GH¢) consumers expect to pay next month for beans, and N is the number of buyers in the market for beans.

Assume the following initial values: ??= 5, ? ?= 40, T = 6.5, ? ? = 5.25, N = 2000, ?? ? = 2479 a) Using the concept of own price elasticity, advise management on price change in order to increase revenue.        b) Explain to your Board of Directors why management should be worried about a rise in the price of groundnut.        c) As a result of the effect of COVID-19 on the economy, the government has proposed an income cut policy. Labour unions have planned a demonstration against this policy and management of Zokia Ghana Limited is considering joining the demonstration. Explain the need to join or not to join the demonstration to your workers using the concept of income elasticity of demand.        d) Determine the equation of the demand curve for beans. (1 Mark)
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Assume also that the estimated supply function for beans is given as:   ?? ? = 19 + 20?? − 10? + 6?? − 32? ? − 20?? + 5? where ?? ? is the quantity of beans supplied each month (in bags), Pb is the price of beans, ? is the price of labor, ?? is an index measuring the level of technology, Pg is the price of groundnut which is related in production, ? ? is the expected future price of beans, and F is the number of firms in the industry. If W = 8, ?? = 4, Pg = 4, Pe = 5 and F = 47,      e. Determine the equation of the supply curve for beans.   (2 Mark) f. Calculate the equilibrium price and quantity of beans.   g. Suppose government realizes that the price of beans does not favour economic growth and hence decrees that, no one should buy beans below GHȼ115 per bag. Identify this type of price control and briefly explain its effect on the market.   h. Sketch the demand and supply curves and examine the welfare of the economic agents, hence find the total welfare of the society.       i. Assuming the government imposes a per unit tax of GH¢5.00 on every bag of beans sold, determine the new equilibrium price and quantity. Explain the effect of the policy on the market.          j. Estimate the deadweight loss from the per unit tax.   

Answer 1

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