Question

Consider the domestic market for frozen orange juice. Assume it is currently in equilibrium. Suppose the USDA is going to release a report in three days on the size of the orange crop in Florida (a substantial supplier of oranges). Suppose you and your partners Mortimer and Randolph get an early look at the report which forecasts a much smaller crop than normal. Believing this report to be reliable (and assuming that you are all wealthy), how could you and your partners profit from this information? Briefly explain.

Answer 1

The best way to profit from this information is to keep a stock of the oranges today . This is because oranges will be available at a lower cost today as compared to tomorrow when the report will release and there will be increase in the price of oranges reducing profits of the firm due to higher cost. Thus, to reduce cost in future, the oranges should be brought today at low cost. This will not increase the total cost of production and thus will help in profit maximization. Thus, stock of oranges should be purchased today to lower cost of production in future.