Question

Question 1
You are the country manager of a firm that produces and markets a generic type of soft
drink in a competitive market in Ghana. In addition to the large number of generic products
in your market, you also compete against major brands such as Coca-Cola and Pepsi.
Suppose that, due to the successful lobbying efforts of sugar producers in Ghana,
Parliament levies a ȼ1.20 per pound tariff on all imported raw sugar: the primary input for
your product. In addition, Coke and Pepsi launches an aggressive advertising campaign
designed to persuade consumers that their branded products are superior to generic soft
drinks. How will these events impact the market outcomes of generic soft drinks if effect of
the tariff is larger the effect of advertising of Coke and Pepsi on the generic type of soft
drink? [Explain with an appropriate graph]
Question 2
Maize is a product produced in a district called Adwensa. Producers in the area are able to
switch back and forth between maize and wheat production depending on market conditions.
As a result the producers of contracted an economist to estimate the supply function for the
producers using data from 30 producers:
�!
" = −124 + 5.0�! − 2.5�# + 1.2� + 0.5�!
Where �!
" is the quantity supplied of maize in bags, �! is the average price of maize (¢ per
bag), �$ is the per unit price of capital, R is the amount of rainfall (in inches) and �! is the level
of technology. In addition, the economist also estimated the demand function for maize as
follows using data from 22 market centres in the district:
�!
% = −120 − 3.0�! + 1.25�& + 0.02� + 0.5�
Where �!
% is the quantity demanded of maize in bags, �! is the average price of maize (¢ per
bag), �& is the average price of wheat (¢ per bag), M is per capita income and A is the amount
of money spent on advertising.
Now suppose the equilibrium values of the variables in the demand and supply functions are
given as:
�! = ¢4; �& = ¢40; � = ¢7500; � = ¢20; �# = ¢8; �! = 100; ��� � = 20 ���ℎ��
i. Estimate the demand and supply curves for maize
ii. Determine the equilibrium price and quantity for maize.
iii. Sketch the demand and supply curves and examine the welfares of the
economic agents and hence find the total welfare of the society.
iv. Suppose the government imposes a tax of GH¢5 on every bag of maize sold,
determine the new equilibrium price and quantity.
v. How would the producers and consumers share the tax per unit?
vi. What is the government tax revenue?
vii. Represent the demand curve, old and new supply curves and estimate the deadweight
loss from tax.
viii. What type of good is maize?
ix. What i

Answer 1

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