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On average, a hectacre produces 50 tons of bananas. For sake of simplicity, let's assume that they are only 100 hectacres of bananas. Total production
On average, a hectacre produces 50 tons of bananas. For sake of simplicity, let's assume that they are only 100 hectacres of bananas. Total production is then 5,000 tons. Assume that disease will destroy 10% of the initial area in year 1 10 hectares. In the second year, only 70% hectares will produce bananas. It means that in year 0, production will be 5,000 tons. In year 1, production is 4,500 tons. In year 2, production is 3,500 tons. Assume the initial price is $1. Assume demand elasticity is -0.5 and supply elasticity is 1.0. (1) Calculate KA for each year. Note that K will be calculated based on the change of total quantity produced instead of the change in yield. You will find a negative KA which is the vertical shift generated by the disease. How does this look graphically? Draw the graph. (2) Calculate the change in consumer and producer surpluses change. Note that it is not positive. Assume that the discount rate is 0.
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