posted by Yasser on .
(A) “Market demand for wheat is relatively stable over time but market supply of wheat is very much influenced by the weather. For example, a natural drought decreases the supply of wheat and pushes up its prices while a bumper crop can severely depress wheat prices. Acts of nature thereby can result in large increases or decreases in the prices of agricultural commodities. The profitability of farmers becomes uncertain, as does the prices of food products and income needed to feed a household.”
Keeping in view the scenario (A), suggest the most appropriate action that the government should take in this situation in order to stabilize the wheat farmer’s income and to encourage them to continue farming whether there are bumper crops or droughts.
(B) “There is an awful lot of coffee in Brazil; it supplies a large share of the world market. In 1994, people first began to realize that a frost in Brazil would cause havoc with the 1995 harvest. The economist magazine at that time reported estimates that the 1995 crop would be less than that of 1994. It was obvious that coffee was going to be scarce in 1995. Anticipating this situation, speculators bought coffee in 1994, bidding up its price even before the supply fell. Following table shows the price rise of coffee during these years.
Keeping in view the scenario (B), analyze whether the demand for coffee is elastic, inelastic or unitary elastic and why?
(Note: Post only the answer of (A) and (B) in the answer box; DON’T post the whole question statement.)
Take a shot, what do you think?
Hint A: What is an insurance policy a common way people avoid financial risks?
Hint B: What would the elasticity of coffee need to be in order for speculators to come in and buy coffee futures.