Answer to Question #159984 in Microeconomics for akshat thakur

Question

Q6.  Based on the following case study answer the given questions:

 

Food prices often rise or fall with good or bad harvests or because of a change in demand. A recent example is the price of Brazil nuts, which by May this year had risen over 60% on European markets. Part of the reason for the price rise has been on the demand side. Consumption of Brazil nuts has increased as more people switch to healthier diets. This includes the purchase of the nuts themselves and as part of healthier snack foods. With supply being relatively inelastic, any rise in demand tends to have a relatively large effect on price.

 

A more acute reason is on the supply side. There has been a very poor harvest of Brazil nuts. The nuts are grown largely in the Amazon basin which has been hit by drought linked to the El Nino effect. This, however, is only a temporary effect and future harvests should increase again as rainfall returns to normal. However, in the longer term, rainfall patterns may change with the effects of global warming.

 

Questions:

A. Explain the supply conditions of Brazil nuts as discussed in the above case with the help of diagrams)

B.     What determines the price of Brazil nuts?

C.     Explain with the help of curves the changing conditions of demand with the help of diagram.

Answer 1

A. The supply of Brazil nuts decreased, as a result the equilibrium price increased and the equilibrium quantity decreased.

B. The price of Brazil nuts is determined by supply, demand and point of their intersection.

C. The demand for nuts increased, as a result both equilibrium price and quantity increased.