Question

Explain what would happen in the market for avocados given the following four demand or supply shocks. In your explanation clearly state what happens to supply or demand (whether supply or demand increased or decreased); and what will happen to the equilibrium price and quantity as a result.

A.) A major scientific study shows that people who regularly consume avocados live on average seven years longer than those who don’t consume avocados.

  

B.) Farmers produce genetically modified avocado plants which allow for greater output without increasing costs.

C.) There is a large increase in the price of tomatoes, which is a complement of avocados (you know, because they go together in guacamole).

D.) There is a significant increase in the price of water in California, where most U.S. avocados are grown.

Answer 1

1- The demand for the avocado will increase and shift to right because of the positive health effects. The rightward shift in the demand curve will increase the equlibrium price and also the quantity.

2 - The genetically modified method will produce more avocados. This will lead to the increase in the supply of avocado. The rightward shift in the supply curve will lead to the decrease in the equilibrium price and increase in equilibrium quantity.

3 - Due to the rise in the price of the complement , the demand for the product decreases. Hence the demand for avocado will decrease. This will lead to leftward shift in the demand curve leading to fall in price and quantity.

4 - The rise in the price of input , increases the cost of production and reduces the supply. Hence the supply curve will shift to left. This will lead to the rise in equlibrium price and fall in equilibrium quantity.