Calculate the price elasticity of supply and interpret it.    

QUESTION 1 [25 MARKS]

Suppose that the price of tomatoes in the market changed from P15 to P12. As a result, a farmer in Oodi reduces his supply of tomatoes from 6 boxes to 5 boxes a week.

1. Calculate the price elasticity of supply and interpret it.                                       [8]

 

 

 

 

 

 

 

 

 

 

 

 

1. Explain the proposition that cross elasticity of supply is negative for substitutes and positive for complements.        [8]

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1. Assume you are a poultry farmer at Mmamashia selling broilers. During the year the government of Botswana through the Botswana Agricultural Marking Board decides to provide a 50% subsidy for all broiler feeds.

 

1. Explain how this intervention is likely to affect the supply of broiler meat. [3]

 

 

 

 

1. Sketch the likely effect of this intervention on the supply of broiler meat on a graph. Please explain your graph.                                                                 [6]

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

QUESTION 2 [25 MARKS]

 

 

A major disease outbreak affecting tomatoes drastically reduces production. Assuming that the market for tomatoes is perfectly competitive, analyse this situation by doing the following:

 

1. Draw a well-labelled graph that shows the market for tomatoes in equilibrium before the disease outbreak, clearly showing both the equilibrium quantity demanded and supplied and equilibrium price.      [10]

 

 

 

 

 

 

 

 

 

 

 

 

 

1. Draw a graph that shows the new situation in the market for tomatoes after the disease outbreak, showing the new equilibrium quantity supplied and demanded and price.                                                                [10]

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

• Explain the movement from one equilibrium to the other in this market. [5]