Question

You are the Economic Consultant for Zuku Farms Ghana Limited. Zuku produces cowpea in a community where producers are able to switch back and forth between cowpea and groundnut depending on market conditions. Consequently, you were tasked by the management of Zuku and you estimated the demand function for cowpea as follows:

where is the quantity of cowpea demanded in bags per month, is the average price of cowpea in Ghana Cedis, is the average price of groundnut in Ghana Cedis, and Y is the income of consumers.

a. Assuming is initially GH¢31.00 per bag, Y is GH¢1001.50

i. Find the resulting demand function for cowpea and determine the number of bags Zuku can sell at

GH¢ 45.00 per bag. 4 marks

ii. Management is considering increasing price of cowpea by GH¢10.00 per bag. Advise management

on this price change using the concept of price elasticity of demand. 2 marks iii. Explain why management should be worried about a reduction in the price of groundnut.

2 marks

Answer 1