This economics question tests your understanding of economic models and analysis. The step-by-step answer below applies the relevant framework and explains the reasoning.
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Question 5 a) A market in Economics refers to any place or system where buyers and sellers interact to exchange goods, services, or resources. This interaction facilitates the determination of prices and quantities traded. b) From Table 2: i)* If the government sets a guarantee price of 150 FCFA per packet of bread, this is known as a price floor or minimum price. ii)* Calculate the costs to the government, if she imposes a price of 200 FCFA per packet of bread and decides to buy the excess in the market. Step 1: Identify quantity supplied and quantity demanded at a price of 200 FCFA from Table 2. At a price of 200 FCFA: Quantity supplied (Q_S) = 200 packets Quantity demanded (Q_D) = 450 packets Step 2: Determine if there is an excess (surplus) or a shortage. Since Q_D (450 packets) is greater than Q_S (200 packets), there is a shortage of 450 - 200 = 250 packets. There is no excess in the market at this price. Step 3: Calculate the cost to the government for buying the excess. As there is no excess to buy, the cost to the government is 0 FCFA. The cost to the government is 0 FCFA. iii)* Calculate the price elasticity of demand if price of bread falls from 250 FCFA to 200 FCFA per packet and identify whether it is elastic or inelastic. Step 1: Identify initial and final prices and quantities demanded from Table 2. Initial Price (P_1) = 250 FCFA Final Price (P_2) = 200 FCFA Initial Quantity Demanded (Q_1) = 300 packets (at 250 FCFA) Final Quantity Demanded (Q_2) = 450 packets (at 200 FCFA) Step 2: Calculate the percentage change in quantity demanded using the midpoint formula. Q = Q_2 - Q_1 = 450 - 300 = 150 Average Q = (Q_1 + Q_2)/(2) = (300 + 450)/(2) = (750)/(2) = 375 \% Q_D = ( Q)/(Average ) Q = (150)/(375) = 0.4 Step 3: Calculate the percentage change in price using the midpoint formula. P = P_2 - P_1 = 200 - 250 = -50 Average P = (P_1 + P_2)/(2) = (250 + 200)/(2) = (450)/(2) = 225 \% P = ( P)/(Average ) P = (-50)/(225) ≈ -0.2222 Step 4: Calculate the price elasticity of demand (PED). PED = (\% Q_D)/(\% P) = (0.4)/(-0.2222) ≈ -1.80 Step 5: Determine if the demand is elastic or inelastic. The absolute value of the price elasticity of demand is |-1.80| = 1.80. Since |PED| > 1, the demand is elastic. The price elasticity of demand is approximately -1.80. The demand is elastic.