ECON100 Economic Essentials for Business Assessment Task 2 Essay complete solutions

ECON100 Economic Essentials for Business Assessment Task 2: Essay complete solutions correct answers key

(20% of the final mark)

Time allowed: 50 minutes.

Essay to be completed in Week 8 of Spring Session in your designated tutorial session.

Write your answers to each question clearly and sufficiently in the exam booklet provided.

This essay topic is based on a newspaper article covering the impact of Cyclone Yasi on Banana industry in Australia in 2011.

Article Source: http://www.smh.com.au/business/yasi-tipped-to-send-banana-prices-soaring-20110203-

1aew8.html

Title: “Yasi tipped to send banana prices soaring” SMH on 3 February 2011 (article is attached on page 2)

Note: Students are encouraged to undertake additional reading on this topic as part of their preparation to write the essay.

Answer All Questions

1. (a) Using your knowledge of basic market structures, briefly explain the type of market into which banana growing industry in Australia falls (5 marks).

(b) According to the article, “… banana prices soared as high as $15 a kilogram, against pre-cyclone prices of closer to $2 or $3 a kilo…”. Explain graphically why banana prices went up after the cyclone

(25 marks).

2. On the basis of your answer to question 1 (a) above, show a theoretical model explaining the equilibrium position (profit/loss situation) for an individual banana producer before the event (you may assume that the banana industry was in the long-run equilibrium before the cyclone) (20 marks).

3. Explain, using appropriate diagrams, the short-run effects of cyclone Yasi on the profitability of banana growing firm and the industry (impact of any cost/price changes should be clearly illustrated and explained along with the assumption(s) you make) (30 marks).

4. How do you expect the Banana market to adjust in the long-run? (20 marks).

Marking criteria

This essay shall be marked by your tutor according to the following criteria:

1. Legibility of hand writing with fully completed cover page.

2. Coherence of the written work, quality of the arguments, degree to which the written work displays adequate understanding of, and reflection on, the relevant economic ideas/concepts/models introduced in the subject.

Yasi tipped to send banana prices soaring

By Eli Greenblat ([email protected])

Consumers may soon be paying triple for their bananas following reports the majority of Australia's crop of the fruit has been wiped out by cyclone Yasi. Initial assessments in Queensland indicate the massive storm may have wiped out as much 90 per cent of the banana crop and that the industry might take 12 to 18 months to get back up to full production. As a result, economists believe consumers could be in store for another national shortage and resulting rocketing prices in line with the impact when the state's crop was flattened by cyclone Larry almost five years ago.

Back then banana prices soared as high as $15 a kilogram, against pre-cyclone prices of closer to $2 or $3 a kilo, with the fruit becoming more of an exotic delicacy than the most popular way to stuff a fruitbowl. Even six months after Cyclone Larry blew through Queensland, many outlets were still charging more than $12 a kilo for bananas with the lack of supply and massive price increases a common grumble among shoppers and a popular discussion topic at barbecues, dinner parties and in the office.

Commonwealth Bank chief economist Michael Blythe said if a large proportion of the banana crop were destroyed this morning, as many now fear, then consumers should prepare for a repeat of skyrocketing prices for the fruit.

"The figures the Australian Bureau of Statistics used back then showed in the June quarter of 2006 there was a 250 per cent rise in the price of bananas due to Cyclone Larry, and what they also said at the time was that [higher] fruit prices overall contributed 0.6 percentage points to inflation - and bananas were most of that," Mr Blythe said.

Compounded costs

This general rise in the cost of staple foods could be compounded by the recent Queensland floods. Earlier this month the Commonwealth Bank predicted a 6 per cent increase in fruit and vegetable prices this year.

"We are beginning to think at the very least we would be looking at a replay of the Cyclone Larry effect and while bananas are only a very small part of the Consumer Price Index (CPI), when there was that kind of huge increase in prices that appeared last time that was enough to add half-a-per cent to the inflation rate," said Mr Blythe.

Other foods could also spike in price this year flowing from the damage wrought on crops by Yasi, with farmers fearing around $500 million worth of the sugarcane crop also lost. Prices of sugar, a key ingredient used in many popular foods, jumped to a 30-year high overnight, in part because of the expected damage from cyclone Yasi.

Cotton prices also rose to a record as the cyclone added to other issues curtailing production of the key fibre crop.