5a Question 5Consider the following case. Sales of chocolate have hit a record high this year as the growingmiddle classes develop a taste for it. The growing taste for chocolate is being driven by rapidlyincreasing incomes and effective marketingchocolate as an affordable good. This rise in demand for chocolate is one of the factors in therapidly increasing price of cocoa (see graph of prices from February 2013 to January 2014).the big chocolate producers who have positionedHowever, increasing demand is not the only factor behind the rapidly rising price of cocoa. Poorweather conditions and the rising cost of fertilizer have combined to reduce crop yields, whilethe relatively better returns from alternatives, such as palm oil and rubber, have reducedinvestment in cocoa production as farmers switch to more profitable alternatives.While the rise in cocoa prices may be a good thing for cocoa producers in countries such asGhana and the Ivory Coast it is not necessarily good for the environment. The increased demandfor cocoa has encouraged farmers to clear greater and greater sections of forest for cocoaproduction, destroying tropical rainforests and hence contributing to global warming. In addition,more intensive farming has encouraged the use of artificial fertilizers, herbicides and pesticideswhich damage the land and the health of those who work on or live near the cocoa farms30002900280027002600250024002300220021002000MarMayJulSepNovJanAn economist argues that cocoa farming is an example of market failure. Governments in cocoaproducing regions need to educate farmers about the external costs of using artificial fertilizersand pesticides or provide financial assistance to help farmers produce in a more environmentallyfriendly way. We need to ensure that these important ecosystems are not sacrificed in the searchof ever greater profits.Page 6 of 7a) Consider the statement "This rise in demand for chocolate is one of the factors in the rapidlyincreasing price of cocoa" Illustrate using demand and supply curves in the market forcocoa assuming it is a competitive market, how the price of cocoa. Label the curves as D2013and S2013 and D2014b) In paragraph two of the case, “However, increasing demand israpidly rising price of cocoa' Use a new supply demand diagram to illustrate how the factorsenumerated in that paragraph two affect the supply curve of cocoa which when combinedwith the demand shift in (a) result in higher cocoa price. Label the curves as D2013 and S2013and D2014 and S2014.the only factor behind thec) Cocoa production appears to generate negative externalities. Which are these and what canthe government do deal with the negative production externalities.

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a) Consider the statement “This rise in demand for chocolate is one of the factors in the rapidly increasing price of cocoa" Illustrate using demand and supply curves in the market for cocoa assuming it is a competitive market, how the price of cocoa. Label the curves as D2013 and S2013 and D2014 b) In paragraph two of the case, "However, increasing demand is not the only factor behind the rapidly rising price of cocoa' Use a new supply demand diagram to illustrate how the factors enumerated in that paragraph two affect the supply curve of cocoa which when combined with the demand shift in (a) result in higher cocoa price. Label the curves as D2013 and S2013 and D2014 and S2014. c) Cocoa production appears to generate negative externalities. Which are these and what can the govemment do deal with the negative production externalities.

a) Consider the statement “This rise in demand for chocolate is one of the factors in the rapidly increasing price of cocoa" Illustrate using demand and supply curves in the market for cocoa assuming it is a competitive market, how the price of cocoa. Label the curves as D2013 and S2013 and D2014 b) In paragraph two of the case, "However, increasing demand is not the only factor behind the rapidly rising price of cocoa' Use a new supply demand diagram to illustrate how the factors enumerated in that paragraph two affect the supply curve of cocoa which when combined with the demand shift in (a) result in higher cocoa price. Label the curves as D2013 and S2013 and D2014 and S2014. c) Cocoa production appears to generate negative externalities. Which are these and what can the govemment do deal with the negative production externalities.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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