Question

  Use four separate supply and demand diagrams to illustrate the effects of the following possible shocks on the equilibrium price and quantity of avocados. In each diagram clearly indicate the initial equilibrium price and quantity with a P₁ and Q₁ and the new equilibrium price and quantity after the shock P₂ and Q₂

A.) A major scientific study shows that people who regularly consume avocados live on average seven years longer than those who don’t consume avocados.

B.) Farmers produce genetically modified avocado plants which allow for greater output without increasing costs.

C.)   There is a large increase in the price of tomatoes, which is a complement of avocados.

D.) There is a significant increase in the price of water in California, where most U.S. avocados are grown

Answer 1

Ans.
A) This study will lead to increase in demand for avocados shifting the demnad curve to the right from D to D' which will increase the price of the avocados from Pe to P' and equilibrium quantity from Qe to Q'.

B) This will increase the farmer's profits, so, they will increase the supply of avacados shifting the supply curve from S to S'. This will decrease the price of avacados from Pe to P' but increase the equilibrium quantity from Qe to Q'

C) As tomatoes and avacados are complementary goods, so, increase in price of tomatoes will lead to decrease in demand for avacados shifting the demand curve leftwards from D to D' which will lead to decrease in price of avacados from Pe to P' and equilibrium quantity from Qe to Q'

D) Increase in price of water will increase the cost of production of avacados leading to a decrease in supply shifting the supply curve leftwards from S to S' which will lead to increase in price of avacados from Pe to P' but decrease in equilibrium quantity of avacados from Qe to Q'.

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