Question

1. A drought in Nova Scotia reduces the apple harvest. What happens to consumer surplus in the

market for apples? What happens to consumer surplus in the market for apple juice? Illustrate

your answers with diagrams.

Answer 1

1. As a drought in Nova Scotia reduces the apple harvest, hence the supply of apples will fall and the supply curve for apples will shift leftward from S1 to S2 and as the economy moves from point C to E, equilibrium price of apples increases from P* to P1 and the quantity of apples decline from Q* to Q1. Also the consumer surplus in the market for apples will fall from the area of ABC to area of ADE.

Now, as the price of apples increases, the cost of producing apple juice will increase, and the supply of apple juice will fall and the supply curve for apple juice will shift leftward from S1 to S2 and as a result as the economy moves from point M to point N, the equilibrium price of apple juice increases from P1 to P2 and the equilibrium quantity of apple juice will decline from Q1 to Q2 and consumer surplus will decline from area of ATM to area of ABN.