1. (a) Using your knowledge of basic market structures, briefly explain the type of market into whichbanana growing industry in Australia falls.
(b) According to the article, "... banana prices soared as high as $15 a kilogram, against pre-cycloneprices of closer to $2 or $3 a kilo...". Explain graphically why banana prices went up after the cyclone.
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)
3. Explain, using appropriate diagrams, the short-run effects of cyclone Yasi on the profitability of bananagrowing firm and the industry (impact of any cost/price changes should be clearly illustrated andexplained along with the assumption(s) you make).
4. How do you expect the Banana market to adjust in the long-run?
Yasi tipped to send banana prices soaringBy Eli Greenblat ([email protected])Consumers may soon be paying triple for their bananas following reports the majority of Australia's crop ofthe 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 ofthe 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 resultingrocketing prices in line with the impact when the state's crop was flattened by cyclone Larry almost fiveyears ago.Back then banana prices soared as high as $15 a kilogram, against pre-cyclone prices of closer to $2 or $3 akilo, 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 amongshoppers 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 weredestroyed this morning, as many now fear, then consumers should prepare for a repeat of skyrocketingprices for the fruit."The figures the Australian Bureau of Statistics used back then showed in the June quarter of 2006 therewas a 250 per cent rise in the price of bananas due to Cyclone Larry, and what they also said at the timewas that [higher] fruit prices overall contributed 0.6 percentage points to inflation - and bananas weremost of that," Mr Blythe said.Compounded costsThis general rise in the cost of staple foods could be compounded by the recent Queensland floods. Earlierthis 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 andwhile bananas are only a very small part of the Consumer Price Index (CPI), when there was that kind ofhuge increase in prices that appeared last time that was enough to add half-a-per cent to the inflationrate," said Mr Blythe.Other foods could also spike in price this year flowing from the damage wrought on crops by Yasi, withfarmers 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 partbecause 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.