ECO201e Managerial Economics
Question 1
(a) Consider an economy where rice is the staple food and the rice market is perfectly competitive. Initially the consumers paid the market equilibrium price for rice.
(i) Using a diagram for the rice market, analyse the market equilibrium, the consumer surplus and the producer surplus. Your diagram needs to have a proper shape of the demand and supply curve that correctly reflects the demand and supply elasticities.
(ii) Analyse the possible impacts of the market price of rice on low-income households. What policies could the government implement to rectify the possible negative impacts? You need to suggest at least three different policies, explain how each policy works and discuss the pros and cons of these policies.
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“The main reason why inefficiency occurs is profit. Perfectly competitive firms are efficient because they are making zero profit in the long run. If the government can impose regulation to make a monopolist earns zero profit, the monopolist can also be efficient”. Discuss the validity of this statement with suitable diagrams for a perfectly competitive firm and a monopolist.
