Question

Question 1

Consider the retail market for bananas in Australia in 2020. The market is in equilibrium with 20,000 tonnes being bought and sold per year at a price of $4 per kg.

Question 21 (5 points)

a. Label the diagram appropriately, by writing the labels i. to vii.

Question 22 (6 points)

b. Explain why $5 per kg for bananas is not an equilibrium price. Given the current demand and supply, if the price was temporarily $5 per kg, explain how the market would return to equilibrium.

Question 23 (4 points)

c. Explain why the production/consumption of 20,000 tonnes of bananas is the socially efficient level of production (assuming there are no externalities).

Question 24 (6 points)

d. Suppose that in 2021 price of diesel increases, increasing the transportation costs for banana farmers in getting their bananas to market. Explain why there would be any movement in the demand or supply curve and any change in the equilibrium price and quantity for bananas after the increase in the price of diesel.

Question 25 (4 points)

e. Suppose that in 2022 the price of bananas increases and the amount of bananas bought and sold increases. What must have happened to the demand or supply of bananas for this to have occurred?

Answer 1

21) Market is in equilibrium where demand = supply when price is $4 and quantity traded is 20,000 units.

22) When price rises to $5, there is supply of B ton units while demand of A ton units. It will result in creation of surplus of banana of B - A ton units. As there is surplus, producers will try to reduce their price to reduce the inventories such that all stock can be cleared. They will reduce the price till the market is in equilibrium again.

23) Production of 20,000 unit is sociall efficient level because at this point marginal cost of production = marginal benefit from consumption.

24) If there is rise in transportation cost, farmers of banana will be induced to grow less of banana which will shift the aggregate supply curve of banana to its left. It will result in rise in price level and fall in quantity traded of banana.

25) If there is rise in price of banana in 2022 and also rise in demand rise in banana traded. There must have been rise in demand in 2022 more than fall in supply in 2021 which will raise the supply of banana in 2022. Rise in demand could be due to many factors such as rise in income, health benefits from banana etc.