(A) “ Market demand forwheat is relatively stable over time but market supply of
ID: 1237791 • Letter: #
Question
(A) “Market demand forwheat is relatively stable over time but market supply of wheat isvery much influenced by the weather. For example, a natural droughtdecreases the supply of wheat and pushes up its prices while abumper crop can severely depress wheat prices. Acts of naturethereby can result in large increases or decreases in the prices ofagricultural commodities. The profitability of farmers becomesuncertain, as does the prices of food products and income needed tofeed a household.”
Keeping in view the scenario (A), suggest the mostappropriate action that the government should take in thissituation in order to stabilize the wheat farmer’s income andto encourage them to continue farming whether there are bumpercrops or droughts.
(B) “There is an awful lot of coffee inBrazil; it supplies a large share of the world market. In 1994,people first began to realize that a frost in Brazil would causehavoc with the 1995 harvest. The economist magazine at that timereported estimates that the 1995 crop would be less than that of1994. It was obvious that coffee was going to be scarce in 1995.Anticipating this situation, speculators bought coffee in 1994,bidding up its price even before the supply fell. Following tableshows the price rise of coffee during these years.
Years
1993
1994
1995
Price ($)
0.9
2.0
2.1
Export Quantity
113
102
85
Keeping in view the scenario (B), analyze whether thedemand for coffee is elastic, inelastic or unitary elastic andwhy?
Years
1993
1994
1995
Price ($)
0.9
2.0
2.1
Export Quantity
113
102
85
Explanation / Answer
A) The government should buy surplus grain during years that theweather doesn't wreak havoc or there are bumper crops, and shouldsell the grain when there are shortages; thereby acting as a bufferand stabilizing prices. B) Ed = the elasticity of demand Ed = (D/D)/(P/P) D = Df - Di = 102 - 113 = -11 P = Pf - Pi = 2 - 0.9 = 1.1 Ed = (-11 / 102) / (1.1 / 2) = -0.196 Value Meaning Ed = 0 Perfectly inelastic. - 1Related Questions
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