Question 1

(a) Consider two farmers, A and B, produce farm products and sell in the same market. Assume that the supply of the two farmers’ products are the same but the demand for Farmer B’s product is relatively more inelastic compared to the demand for Farmer A’s product.

Initially the equilibrium price and quantity of both farmers’ products are the same. There is an improvement in the farming technology which affects both farmers’ products equally.

Draw a suitable diagram to illustrate and explain the effect on the equilibrium price and quantity of both farmers’ products. Who benefits more from this technological improvement? Justify your answers.

(b) “To increase the welfare of producers, a subsidy is always better than a price floor”. Explain the validity of the statement with a suitable diagram.

(c) A monopolist who encounters a linear demand curve and should always produce at the point where the demand is unit elastic in order to maximize profit. Do you agree? Explain.