Central American and Caribbean countries are major producers of bananas. Bananas
ID: 1156404 • Letter: C
Question
Central American and Caribbean countries are major producers of bananas. Bananas are however also produced in some countries in South America, Africa and Asia. There are adverse weather conditions in Central America and the Caribbean, leading to widespread failure of banana crops. The price of bananas rises sharply as a result. (a) Explain, using demand and supply analysis, the impact of these events on the demand for apples in Europe. (5 marks) (b) Explain how banana producers in other regions of the world may be affected by the crop failure in Central America and the Caribbean. (5 marks) (c) Explain the economic effects of publicity claiming that bananas lack nutritional value and that eating them could even be harmful to health. (5 marks) (d) Explain the impact of a better growing season in the following year on the price of bananas from Central America and the Caribbean. (5 marks) (e) A business man has first calculated price elasticity of demand for product A as PED A = -2.5 He intends to raise the price of A. What will be the resulting effect on the revenue from product A? (5 marks) Elastic A given % rise in P will be more than offset by a larger % fall in Q so that total revenue – (P x Q) falls (Total: 25 marks)
Explanation / Answer
a) Due to adverse weather conditions the supply of bananas fall . The price of banana rises . Apple is a substitute product . They are not identical substitute but close ones . Hence demand for apples rises since banana is highly priced now . Hence , the demand for apples shift right or rises in Europe .
b) Banana producers in other parts of the world are benefitted due to this crop failure in Central America . The world price of banana rises or overall demand for banana in the world is higher than supply . So producers can export these bananas and charge higher prices .
c) If such claiming is done then demand for bananas fall drastically . The demand curve shifts left . Equilibrium price and quantity both falls .
d) A better growing season in the following year , increases supply of bananas . So the supply curve shifts right . Hence , equilibrium price falls and quantity rises .