Question

The Federation of Vegetable Farmers Association of Malaysia (FVFA) reported that a lack of workers caused a 25% drop in production that drove up vegetable prices by 50% in rural areas and by 100% in urban areas.

Draw two demand/supply diagrams, one for the rural and the other for the urban market of vegetable oil and qualitatively illustrate this fact.

How can you use the information provided by the FVFA to estimate the price elasticity of demand in rural areas and in urban areas?

Suppose the price elasticity of supply of vegetable oil is equal to 0.75 in both areas.

3. Do you have enough information to discuss whether an increase in the price of coconut oil, a substitute of vegetable oil, would increase or lower the price of vegetable oil in rural and in urban areas? Discuss.

4. Do you have enough information to discuss whether an increase in median household income would have a stronger effect on the price of vegetable oil in rural or in urban areas? Discuss.

Answer 1