7) Consider the following editorial that appeared in following a freeze that destroyed much of the
coffee crop in the late 1970s :
Coffee prices, it seems, are coming down again, after hitting a record high
of $4.42 last year. An Agriculture Department economist, who had predicted
$5-a-pound coffee this year, says he "underestimated the power of the US
consumer movement." Perhaps, or maybe, as with so many economists these
days, he simply forgot his freshman economics, witch has nothing to do with
"movement." The coffee market is behaving the way the basic textbooks say
a market behaves : Prices go up, demand falls and prices come down.
- The Wall Street Journal, November 30, 1977
Suppose that coffee had started out at an equilibrium price of $1.00/pound prior to the
freeze.
a) Sketch graphically the initial equilibrium, labelling supply and demand as Su and D
respectively.
Use Qs to identify the original equilibrium quantity.
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b) Show the effect of a freeze that destroys much of the coffee crop, labelling the new
supply curve
as S2 and the new equilibrium quantity as Q (The new equilibrium price is $4.42)
[4]
c) Is it a change in demand as shown in your answer to part (b) ? Explain.
[4]
d) Based on your analysis in parts (a-c), comment on the article published.
[3]