QUESTION 2 [25 MARKS]

The demand and supply functions of an agricultural product (call it 'good X') are given by:

Qd = 60 3P

Qs = 2P 10,

Where P is price (in Rs.) per unit, and Qd and Qs are quantities demanded and sold, respectively, in thousands of units.

(a) Find the equilibrium price and quantity good X. Using a demand and supply diagram, show how you will represent the above information. In your answer, clearly label your axes, prices and quantities and the equilibrium price.[5 marks]

(b) Due to unfavourable climatic conditions such as heavy rainfall events leading to flooding that wipe out entire crops over wide areas, reduced plant growth and increase the cost of living of farmers, the Mauritian government contemplates to set the price of good X at Rs 16 per unit.

(i) Is there a shortage or surplus at this price?

[1 mark]

(ii) Calculate the resulting shortage or surplus at this price.[4 marks]

(c) Starting at the initial equilibrium, suppose a sales tax of Rs. 3 is now imposed on each unit of good X.

(i) Calculate the new equilibrium price and quantity.[6 marks]

(ii) Explain how the burden of the tax is shared between consumers and the seller of good X.[5 marks]

(iii) How does the price elasticity of demand for good X affect the incidence of the tax?[4 marks]

Part 2

a) Differentiate between the features of perfect competition and monopoly.[10 Marks]

(b) Define the term "barriers to entry". List down the types of barriers that monopolists impose to new entrants.[10 Marks]

(c) Are monopolies always bad? Justify your answer.[5 Mark