Since the introduction of the import ban, there have been two serious cyclones that have devastated the banana crop in Australia. In the rest of this problem, we are interested in understanding how the existence of cyclones changes the incentives of domestic suppliers to produce. You should continue to assume that the Australian government bans the import of all bananas and that no other banana producers can enter the market and sell between the planting decision and the harvest decision. You may also assume that all farmers are risk neutral and are maximizing their expected profit.

Extra Info Needed: Planting cost is $2.00 per kilo

Harvesting cost is 0.50 per kilo

Question 6: Suppose that in a given year, 110 farmers have chosen to plant bananas and each one has chosen to plant 12,500 kilograms. Prior to the harvest occurring, a hurricane occurs that wipes out the crop of 55 farmers. Draw the resulting supply and demand graphs. What is the new equilibrium price? What is the producer surplus of a farmer who is not affected by the typhoon? What is the producer surplus of a farmer who is affected by the typhoon?

Question 7: Suppose that a typhoon occurs each year with probability 1/12 and that a typhoon will destroy bananas from exactly half of the farmers who choose to plant in a particular year. Calculate the expected profit of each farmer (including the planting costs) if exactly 110 farmers enter the market, and each chooses to plant 12,500 kilograms of bananas. Explain why you would expect additional farmers to enter into the market when typhoons are possible. Discuss what this implies for equilibrium prices in years where a typhoon does not occur.

Question 8: Continue to assume that a typhoon occurs each year with probability 1/12 and that a typhoon will destroy bananas from exactly half of the farmers who choose to plant in a particular year. Further suppose that Australian farmers have the option of exporting bananas to the world at a price of $2.00. Assume that 116 farmers choose to plant in a given season and each farmer produces exactly 12,500 kilograms of bananas. Draw the supply and demand system for the case where a cyclone does not occur. How many bananas will Australia export in this case? Draw the supply and demand system for the case where a cyclone does occur. Calculate the surplus of each farmer (after planting) and show that it is exactly equal to the planting costs.