Answer on Economics of Enterprise Question for charlie
Question 2: Consider the following sequence of events in the United States market for strawberries during the years 2010-2013:
➢ 2010: uneventful. The market price was $5.00 per bushel, and 4 million bushels were sold.
➢ 2011: There was a scare over the possibility of contaminated strawberries from the US state of Michigan. The market price was $4.50 per bushel, and 2.5 million bushels were sold.
➢ 2013: By the beginning of the year, the scare over contaminated strawberries ended when the media revealed that the initial reports about the contamination were a hoax. Hence, demand rebounded to its pre-scare levels. A series of floods, however, destroyed significant portions of the strawberry fields in other US states, including Iowa, Illinois and Missouri. The market price was $8.00 per bushel and 3.5 million bushels were sold.
Answer the following questions:
Hint: Keep in mind for the following that (1) if we are given no information about shortages or surpluses, we take observed price and quantity to be equilibrium price and quantity; (2) you must be careful shift the appropriate curve – demand or supply.
a. [7 marks] Draw a diagram depicting the US demand and supply of strawberries in 2010. Explain your diagram, labelling the axes and justifying the shape of your demand and supply functions. Sketch the equilibrium price and output levels on your graph and explain why this must be where market demand and supply are equal.
b. [8 marks] What other determinants other than price might affect market demand and supply? Hence, depict and explain the price and output movements in this market from 2010 to 2011.
c. [5 marks] Depict and explain the price and output movements from 2011 to 2013.
d. [5 marks] Assume that (inverse) demand and supply curves are linear, of the form P = A-BQ and P = C+DQ, where Q is market quantity and P is market price. Also, assume that all the shifts in demand and supply from 2010-2013 are parallel shifts (i.e., slope remains constant in a “parallel shift”). Hence, using the shifts from 2010-2011, calculate the slope of the supply function in this market. Using the shifts from 2011-2013, calculate the slope of the demand function in this market.
e. [5 marks] Using your answer to (d) and the equilibrium price and output figures you have been given in 2010, calculate numerical values for the constants A and C in the equations of (inverse) demand and supply.
f. [5 marks] Using your answer to (e), predict the effect on equilibrium price and quantity of a 1 unit upwards shift in demand (i.e., an increase of 1 in the constant “A”).
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