Question

Suppose the papaya market in Malaysia is perfectly competitive. The cross-price elasticity of demand for papaya with regard to the price of mango is -0.5. Other things being equal, explain the effect each of the following situations will have on the equilibrium price and quantity of papaya if: (a) researchers found that mangoes have cancer-fighting properties (use an appropriate diagram). [4 marks]

(b) the price of fertiliser used for papaya rises (use an appropriate diagram). [4 marks]

(c) both events in (a) and (b) happen simultaneously (no diagram required). [2 marks]

Answer 1

The cross price elasticity of demand for papaya and mango is -0.5 indicating that papaya and mango are complementary goods.

A) this will increase the demand for mangoes and increase its price and quantity demanded. Since papaya is consumed with mango, the demand for papaya will also increase. As the demand curve shift to the right the price and quantity both will increase

B) this will increase the cost of production for papaya. Supply decreases and the supply curve will shift to the left. The price will increase and the quantity will fall

C) because the the quantity is increasing in the first part and decreasing in the second part the change in quantity is ambiguous. The price will eventually increase.