Question

You are the Economic Consultant for Zuku Farms Ghana Limited. Zuku produces cowpea in a community

where producers are able to switch back and forth between cowpea and groundnut depending on market
conditions. Consequently, you were tasked by the management of Zuku and you estimated the demand
function for cowpea as follows:

where is the quantity of cowpea demanded in bags per month, is the average price of cowpea in Ghana
Cedis, is the average price of groundnut in Ghana Cedis, and Y is the income of consumers.
a. Assuming is initially GH¢31.00 per bag, Y is GH¢1001.50
i. Find the resulting demand function for cowpea and determine the number of bags Zuku can sell at
GH¢ 45.00 per bag. 4 marks
ii. Management is considering increasing price of cowpea by GH¢10.00 per bag. Advise management
on this price change using the concept of price elasticity of demand. 2 marks
iii. Explain why management should be worried about a reduction in the price of groundnut.
2 marks
Assume also that your estimated supply function for cowpea as follows:

Where is the quantity supplied of cowpea in bags, and are as defined above, is the price of
fertilizer per bag, is the amount of rainfall (in inches).
If inches and = GH¢31.00.
b. Find the resulting supply function for cowpea and determine the equilibrium price and quantity.
4 marks
c. Assuming the government imposes a tax of GH¢10 on every bag of cowpea sold, determine the new
equilibrium price and quantity. Explain the effect of the policy on the market.
6 marks
d. Sketch the demand curve and the supply curves for cowp

Answer 1

Step-by-step explanation:

ii. See that the elasticity of demand is fairly inelastic that's 0.34 is less than 1 so a percentage increase in price causes a less than percentage change in quantity demanded hence we advise management to increase prices because it will increase total revenue

iii. The coefficient of Pg is positive that shows there is a positive relationship between cowpea and groundnuts. This shows that cowpea and groundnut are substitutes. So an increase in the price of groundnuts will cause the quantity demanded of cowpea to increase by 16.2 units and vice versa. So a decrease in the price of groundnuts, will decrease the quantity demanded for cowpea which may force its price down and also reduce the total revenue. So this should be a great concern to management

Answer 2

The answer and explanation to part 1 is given in the attachment.

Note:

Also, The complete part a question is attached.