Note: For all sub-questions of Question 1, your answer should not exceed 500 words excluding
figures and tables.
(a) Consider two farmers, A and B, produce farm products and sell in the same market.
Assume that the supply of the two farmers’ products are the same but the demand for
Farmer B’s product is relatively more inelastic compared to the demand for Farmer A’s
product. Initially the equilibrium price and quantity of both farmers’ products are the
same. There is an improvement in the farming technology which affects both farmers’
products equally. Draw a suitable diagram to illustrate and explain the effect on the
equilibrium price and quantity of both farmers’ products.
Who benefits more from this
technological improvement? Justify your answers.
(b) “To increase the welfare of producers, a subsidy is always better than a price floor”.
Explain the validity of the statement with a suitable diagram.
(c) A monopolist encounters a linear demand curve should always produce at the point
where the demand is unit elastic in order to maximise profit. Do you agree? Explain.