BEEB 2013 MICROECONOMICS

2nd SEMESTER 2016/17 SESSION

ASSIGNMENT ONE

Structured Questions

11) Many governments around the world implement agricultural policies that support their
farmers. These policies include having price floors, price support programs and production
quotas. Assume that the market demand and supply of paddy in Malaysia are QD = 15 2P
and QS = 5P 2.5 respectively, and both are measured in millions of tons per year.

a) Calculate the initial market equilibrium (P0 and Q0) when there is no government
intervention. Illustrate this initial market equilibrium in an appropriate diagram with price
of paddy on the Y-axis and quantity of paddy on the X-axis.
(5 marks)

b) Calculate the price elasticity of demand for paddy at the initial market equilibrium. Is the
price elasticity of demand elastic or inelastic at this initial market equilibrium?
(5 marks)

c) Lets assume that the price of paddy suddenly rises to P = RM3 per ton in this competitive
market. Please explain how the market adjust in order to achieve equilibrium.
(5 marks)

d) Suppose that the Malaysian government imposes a price floor at P = RM3 per ton.
Calculate the new market equilibrium (P1 and Q1) under this policy and show this new
equilibrium on the same diagram in (a). What is the economic consequences of this policy?
(5 marks)
12) Please read the following article and answer the questions that follow;

'Many factors affect veggie prices'

By Sylvia Looi
CAMERON HIGHLANDS: It is difficult to keep vegetable prices low due to several factors,
said farmers and transporters.
Cameron Highlands Vegetable Growers Association secretary Chay Ee Mong said this was
because almost 90 per cent of things that farmers must spend on, such as pesticide, fertiliser and
seedlings, were imported.
Citing fertiliser as an example, Chay said its price increased from RM2,000 to RM2,700 per
tonne last year.
The problem is worsened by the weak ringgit.
He said consumers argue that the drop in petrol price should translate to lower prices for
vegetables, but farmers, too, had to pay the Goods and Services Tax (GST).
He said authorities could consider offering incentives to farmers mitigate the rising costs.
For example, the government can waive GST on pesticide, fertiliser and seedlings.
Chay said the prices of greens were determined by market forces and not by farmers.
Supply and demand plays a big role in determining the prices, he said, adding that other
factors, such as weather, also impacted prices.
Chay told the New Straits Times that every time a farmer delivered his produce, he only knew an
indicative price for it.
Normally, the final price is not too far from the indicative price.
He said vegetable prices would usually drop when there was a glut.
For instance, there is a glut of choy sum in the market due to good weather in the lowlands, he
said, adding that some farmers were resorting to destroying choy sum rather than sending it to
markets as its low price meant that it was not cost efficient to do so.
Chay said Cameron Highlands farmers sent 50 per cent of their produce to the Selayang
Wholesale Market and the rest to Ipoh (20 per cent), Singapore (20 per cent) and other places (10
per cent).
Echoing Chays sentiment, transporter Kwang Ting Woon, who sends vegetables from Cameron
Highlands to the lowlands, said transport companies had no means to keep operating costs low.
He said increases in prices were a recurring problem.
There are times when the prices of vegetables go up and other times, they are down, like now,
said Kwang, who is also a tomato farmer.
To save costs, Kwang said, transporters would pick up items from the lowlands and send them to
Cameron Highlands.
Our lorries are never empty. They go to the lowlands full of vegetables and come up filled with
items farmers and villagers here need.
Kwang said among the fixed costs that transporters had to pay monthly were drivers salaries,
diesel, lorry spare parts and insurance.
The rate now is between 10 sen and 13 sen for every kg of vegetables sent, he said, adding that
drivers were paid RM200 per trip to Kuala Lumpur.
He said it would be a relief for transporters if the government could provide tax incentives and
allow toll-free transport for vehicles ferrying food items.
We do not have time to do our taxes. We are too busy making ends meet. If the government
does not help us, who can we turn to?
Source: NST, 4 February 2016

a) What are the factors affecting the quantity supplied (QS)?

(5 marks)

b) How does a glut of choy sum in the market pushes down the price of choy sum? Explain with the
help of an appropriate diagram.
(5 marks)

c) Why did some farmers resorting to destroying choy sum rather than sending it to markets? Explain
with the help of an appropriate diagram.
(5 marks)

d) Briefly explain how does the weakening of Ringgit affects the prices of vegetables?
(5 marks)