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Instructions:
- Answer all questions and show all workings
- All graphs must be properly displayed with descriptive title, appropriate scales, as well labels for the axis, curves and equilibrium where necessary
- Calculate all elasticity using the midpoint formula
The Consumer Affairs Commission (CAC) undertakes various surveys in its bid to promote and protect the interests of Jamaican consumers. Regular Grocery survey is conducted by collecting information from supermarkets and shops island-wide. The most recent survey found the prices of various items have increased significantly over the past year.
Of the 12 supermarkets surveyed in the Corporate Area, Shopper’s Fair supermarket in Duhaney Park was found to have the lowest prices. Despite this the prices of eggs and margarine (227g) of have seen significant increases at this location. Table 1 shows the prices and other market information for these products.
| Date | price of“EGGS” | quantity of “EGGS” demanded | price of “MAGARINE” | quantity of “MAGARINE” supplied | |
|
| Feb, 2012 | $200 per doz | 1100 doz | $190each | 800 units | |
| March, 2013 | $235 per doz | 750 doz | $220each | 1200 units | |
Table 1
Mrs. Johnson, a regular customer at Shoppers Fair, welcomed the survey and stressed that she only shop at Shopper’s Fair supermarket in Duhaney Park because it is the “poor man’s supermarket”. In the meantime, president of the Jamaica Manufacturers’ Association (JMA) is urging consumers not to blame local business producers for the increase in prices. He stated that many businesses are trying to contain prices and be more efficient but the cost of electricity and raw materials sometimes leave them with no choice but to pass on the burden to the consumer.
Several supermarket retailers are now threatening to close down, saying they cannot compete in an environment where prices are heading. They also complained that the survey method used by the CAC is flawed because the CAC does not take into consideration the prices at which they bought their produce. In spite of this, the Minister of industry, investment and commerce, said that the publication of grocery prices will continue as it is intended to put pressure on retailers in an effort to have the best prices within the marketplace.
Answer 1-7 based on the scenario above
- Calculate the price elasticity of demand for EGGS and interpret your result? (3 marks)
Explain the determinants of elasticity of demand for EGGS? (3 marks)
If Shopper’s Fair want to increase their revenue from selling eggs would you recommend they offer a discount on this product? Justify your answer (2 marks)
- Calculate the cross-price elasticity and state the relationship between EGGS and MAGARINE? (3 marks)
Draw a demand and supply graph that explains what will happen in the egg market when the price of MAGARINE increases. (4 marks)
Identify two other products that are likely to have a positive cross-price elasticity of demand with EGGS. Explain your choice. (2 marks)
- Calculate the income elasticity of demand for “EGGS” if the average income spent on this product increases from $2000 to $2200 and interpret the result.(3 marks)
Based on the relationship between eggs and margarine above, use a demand and supply diagram to illustrate the effect on EGGS market when income increases.(4 marks)
- Calculate the price elasticity of supply for “MAGARINE” when the price changes and interpret your result.(3 marks)
Is there any set of relationships between price elasticity of supply and total revenue? Explain your answer. (2 marks)
- Suppose that the government thinks that EGG farmers’ incomes are too low so it sets a minimum price eggs above the market price. Demonstrate this situation with a graph and explain what happens to the prices and quantities of eggs as a result of the price floor? (5 marks)
- How will the following events affect equilibrium price and quantity of EGGS in a competitive market? In each case, sketch a graph to help explain your answer.
A decrease in the cost of electricity and raw materials to produce eggs (4 marks
Several producers and distributors of eggs plan to close down their business because they are finding it impossible to compete in an environment where prices are rising sharply (4 marks)
- Suppose that the demand for MARGARINE is given by Q = 1,000 – 5P and the supply is given by Q = 4P – 80
show that the equilibrium Quantity is 400. (2 marks)
what is consumer surplus and producer surplus at this equilibrium? (6 marks)
TOTAL (50 MARKS)
