AEB 212: INTRODUCTION TO AGRICULTURAL ECONOMICS

ASSIGNMENT 1 DUE: 25/11/18

INSTRUCTIONS

In Groups of five (5) attempt the following questions.

Q 1. Rati’s demand for apples is Qd = 90 – 4P.

ai) At price P = 10, what is the price elasticity of demand? …. …………………………. (4)
Quantity demanded for apples

ii) Give the type or category of elasticity in (a) above …………………………… …… (2)

bi) Calculate the price elasticity as the price moves from P0 = 10 to P1 = 15 by using the mid-
point (arc) price elasticity of demand formula …………………………………………… (4)

ii) Interpret the elasticity in (bi) above……………………………………………………. (2)

Q 2. The price of ice cream decreases by 10%. As a result, Letty’s demand for cheesecakes
decreases from 11 cheesecakes to 9 cheesecakes.
a) Calculate the cross-price elasticity of demand for Letty, for these two goods.................. (4)

b) From Letty’s perspective, is ice cream a substitute or a complement good for cheesecakes
and why? …………………………………………………………………………………… (3)

Q 3. Thato got an income increment at work, and her income increases by 25%. As a result,
her demand for fat cakes decreases by 15%.
a) Calculate Thato’s income elasticity of demand for fat cakes? ......................................... (3)

b) What does this income elasticity tell us about Thato’s valuation of fatcakes and give a
reason for your answer? …………………………………………………………………… (3)
Q4. a) With relevant examples clearly differentiate between implicit and explicit costs… (4)
b) Complete the table below. (10)
Total Total Total Total Average Average Average Marginal
Produc Fixed variable cost Fixed variable Total cost
t Cost cost cost cost cost
0 300 0 300 - - - -

1 300 90 390 300 90

2 300 170 470

3 300 240 540

a) Explain the behaviour of average fixed costs as output increases. …………………… (2)