Question

The banana is one of Australia’s most commonly consumed fruits. Each year, over 95% of households will buy at least one banana and the average person in the population will consume roughly 16kg.

While bananas come in over 1,000 varieties, the Cavendish banana accounts for just over half of global production and 97% of production in Australia. Since the early 2000s, Cavendish bananas have been under threat from a fungus known as Tropical Race 4. This fungus has the potential to make the Cavendish banana go extinct. In response, the Australian government has placed a stringent quarantine policy for the importation of bananas from other countries such as the Philippines, which are the low-cost producers in the region.

Bananas are produced in only a few areas of Australia and the crop is frequently disrupted by typhoons. In this problem set we will explore how these typhoons are likely to impact the decision of farmers to plant bananas and the incentives that exist when a country is allowed to export a commodity but not import it.  

the equation of demand is :QDp=1,500,000-50,000p

Part 3:  

Since the introduction of the import ban, there have been two serious cyclones that have devastated the banana crop in Australia. In the rest of this problem, we are interested in understanding how the existence of cyclones changes the incentives of domestic suppliers to produce. You should continue to assume that the Australian government bans the import of all bananas and that no other banana producers can enter the market and sell between the planting decision and the harvest decision. You may also assume that all farmers are risk neutral and are maximizing their expected profit.

Question 6: Suppose that in a given year, 110 farmers have chosen to plant bananas and each one has chosen to plant 12,500 kilograms. Prior to the harvest occurring, a hurricane occurs that wipes out the crop of 55 farmers. Draw the resulting supply and demand graphs. What is the new equilibrium price? What is the producer surplus of a farmer who is not affected by the typhoon?

What is the producer surplus of a farmer who is affected by the typhoon? (4 points)

Question 7: Suppose that a typhoon occurs each year with probability 1/12 and that a typhoon will destroy bananas from exactly half of the farmers who choose to plant in a particular year. Calculate the expected profit of each farmer (including the planting costs) if exactly 110 farmers enter the market, and each chooses to plant 12,500 kilograms of bananas. Explain why you would expect additional farmers to enter into the market when typhoons are possible. Discuss what this implies for equilibrium prices in years where a typhoon does not occur. (4 points)

Question 8: Continue to assume that a typhoon occurs each year with probability 1/12 and that a typhoon will destroy bananas from exactly half of the farmers who choose to plant in a particular year. Further suppose that Australian farmers have the option of exporting bananas to the world at a price of $2.00.   Assume that 116 farmers choose to plant in a given season and each farmer produces exactly 12,500 kilograms of bananas. Draw the supply and demand system for the case where a cyclone does not occur. How many bananas will Australia export in this case? Draw the supply and demand system for the case where a cyclone does occur. Calculate the surplus of each farmer (after planting) and show that it is exactly equal to the planting costs. (10 points)

Part 4:

In the article “Economist under fire for banana import suggestion” there is a discussion between Saul Eslake and the Australian Growers industry regarding the importation of bananas in years where a cyclone occurs. Saul argues that Australian consumers could be made better off by allowing imports to occur after cyclones. He writes "Words such as 'greedy', 'grasping' or 'pricegouging', routinely applied to banks, oil companies and airlines, pass nary a lip when it comes to growers… I suppose the difference reflects the fact that when it comes to fruit and vegetables, we are talking about 'our' farmers, who have been 'doing it tough' through drought and now tempest - as opposed to someone else's big, profitable corporations, run by highly paid suits - so that we don't begrudge them the occasional opportunity to indulge in a spot of 'price-gouging'."

The ABGC counters with an argument about biosecurity and the makes the following economic argument: “What Mr. Eslake does not realise is that banana prices are determined by the free market of supply and demand.”

Question 9: Continue to assume that the probability of a cyclone in a year is 1/12 and that a cyclone will destroy exactly half of the total amount of domestic bananas produced and that all farmers who enter will grow exactly 12,500 kg of bananas. Using your knowledge from Questions 1-8 briefly, explain what will happen if the Australian government commits to the following policy prior to planting:  

After each harvest, the government will count the total number of bananas harvested by Australian producers.  

• If the total is above 1,275,000, the government will not allow any imports.
• If the total is below 1,275,000, the government will grant quotas so that the total amount supplied to the market is exactly 1,275,000.

In explaining your answer, be sure to describe:

1. What happens to the prices of bananas in years with a typhoon and in years without the typhoon?
2. The total change in the consumer surplus in years with a typhoon and in years without a typhoon.
3. The total number of bananas planted in each year.
4. The overall impact of welfare for Australian banana growers.

Based on your analysis, would total welfare (consumer + producer surplus) be better off if we could guarantee that there were no biosecurity risks and imports were allowed? (10 points)

Answer 1