Question

Suppose that an economist estimated the following regression equation for the supply of avocados.

Where P_Fis the per-ton price of fertilizer, Q_Sis in millions of pounds per month and the price of avocados is in dollars per pound.

a.   Determine how much the supply curve shifts if the price of fertilizer rises by $1.10 per unit.

b.   Explain why a change in the price of fertilizer causes a shift in supply for avocados rather than a movement along the supply curve.

c.   Holding the price of fertilizer constant, by how much would the price of avocados need to rise to cause an increase of 60 million pounds per month in the quantity of avocados supplied?

Qs-58+15Pa-20Pf (Regression Equation)

Answer 1

We have an equation for the supply of avocados: Qs = 58 + 15Pa - 20Pf

Where P_Fis the per-ton price of fertilizer, Q_Sis in millions of pounds per month and the price of avocados is in dollars per pound.

a.   If the price of fertilizer rises by $1.10 per unit, then quantity of avocados would decrease by 1.10 x 20 = 22 million units. Hence, supply curve shifts to the left by 22 million pounds per month.  

b. A change in the price of fertilizer causes a shift in supply for avocados rather than a movement along the supply curve because the movement along the supply curve occurs when there is a change in own price of the good. Here the own price is the price of avocados and not the price of fertilizers which is changing. Hence there is a shift and not a movement

c.   Holding the price of fertilizer constant, an increase of 60 million pounds per month in the quantity of avocados supplied would occur when the price of avocados falls by 60/15 = $4 per pound.