AEB 212

INTRODUCTION TO AGRICULTURAL ECONOMICS

TEST 2

[TOTAL MARKS = 50 MARKS]

Monday, November 26, 2018

1400 - 1530 HRS

STUDENT NAME AND ID NUMBER

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INSTRUCTIONS:

1. PLEASE WRITE NEATLY AND LEGIBLY.

2. ANSWER ALL QUESTIONS IN THE SPACES PROVIDED

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SECTION A: 25 marks
1. State the Law of Supply (2)
It states that there is always a positive relationship between the quantity and price of a
good. In other words, higher the price of a good; higher the supply of that good and
vice-versa.

2. List and explain any five (5) determinants of supply (10)

1. Cost of production
2. Quantity available in market
3. Change in technology
4. Number of suppliers
5. Price expectation of goods
6. Demand of the product
7. Prices of other goods

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3. Illustrate the effects of a decrease in the supply on the equilibrium. (use a graph to
illustrate) (5)

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4. Explain the Marginal Rate of Substitution (MRSxy) (2)
MRSxy is the ratio of change in good Y to a given change in X.
The marginal rate of substitution of X for Y (MRSxy) is in fact the slope of the curve
at a point on the indifference curve.

5. State and explain any three (3) determinants of price elasticity of demand. (6)
Substitutes of the commodity available
Time period
Proportion out of total expenditure
Necessity or comfort goods, luxury goods
Addicted or habitual goods
Income/wealth
Possible uses of the good
The importance of the product’s cost in one’s budget

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SECTION B: 25 marks
1. With the aid of diagrams (graphs), explain the categories of Price elasticity of Demand.
(10)
Ed = 0 (Perfectly inelastic demand)
0 < Ed < 1 (Inelastic or relatively inelastic demand)
Ed = 1 (Unit elastic or unitarily elastic demand)
1 < Ed < ∞ (Elastic or relatively elastic demand)
Ed = ∞ (Perfectly elastic demand)

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 2. Suppose that Thato consumes bananas and apples. The price of bananas decreases
from P3 to P2 per bag whereas that of apples remains constant at P2.50 per bag. Thato
increases her demand for bananas from 10 bags to 12 bags per month.
I. Calculate the Price Elasticity of Demand for Bananas. (interpret your
answer) (3)

10−12
∗3+2
10+ 12
=−0.45
3−2
A 1% change in the price of bananas, results in a 0.45 % change in the
quantity demanded for bananas.

II. Suppose that due to the price decrease in bananas, Thato decreases her
consumption of apples from 8 bags to 6 bags. Calculate the Cross Price
Elasticity of Demand. (interpret your answer) (3)

8−6
∗3+ 2
3−2
=1.43
8+ 6
1% change in price of bananas results in a 1.43% change in quantity
demanded in apples.

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3. Explain the three (3) types of production responses in the short run production cycle.
(3)

Increasing Returns: This occurs when each added unit of the fertiliser (the variable
input) adds more to output than previous unit.
Constant Returns: This occurs when each additional unit of the variable input adds the
same amount of units to the total output.
Decreasing returns: this occurs when each additional unit of the variable input adds an
amount less than the previous unit added to the total output.

4. With the aid of a diagram, explain the three (3) stages of production (6)

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