AGRIBUS 7055. Global Food and Agricultural Markets.
THE LAST EXERCISE (30 points total)
Open book (Wow!)
Give everything a second thought – don’t be fooled by economists.
Use your comparative advantage – spend more time on things you know better.
PART A: TRUE OR FALSE (1 point each, 15 points total)
In the first column of the following table, write “T” if the statement is true or “F” if it is false.
| 1 | If the demand is inelastic to price, cutting price will increase revenue. | |
| 2 | Most public goods are provided by the market. | |
| 3 | Dairy supply shortage will lead to cornflake price increase, ceteris paribus.* | |
| 4 | Environment generally deteriorates with economic development. | |
| 5 | Opportunity cost is the cost to produce something using comparative advantage. | |
| 6 | Import tariffs will benefit both producers and consumers in that country. | |
| 7 | The share of food expenditure in income will increase as income increases. | |
| 8 | Food export benefits consumers in both exporting and importing countries. | |
| 9 | The demand of staple foods is usually very elastic to price change. | |
| 10 | Agribusinesses should look for a location that generates the highest revenue. | |
| 11 | Adverse selection and moral hazard depict the same type of market failure. | |
| 12 | A monopolist will excessively supply the market to maximise its profit. | |
| 13 | Government should not do anything in competitive markets. | |
| 14 | Currency appreciation will hurt domestic consumers. | |
| 15 | The total product concept only describes the features of the existing product. |
* The Latin phrase “ceteris paribus” means everything else remains unchanged.
PART B. NUMERICAL ANALYSIS (1 point each, 9 points total)
BRIEFLY answer each question. Pure games of numbers – no calculus or other math required.
PROBLEM 1
Here below is the production possibility set of two countries, Atlantis and Utopia, both of which want to specialise in producing one type of fruit according to their comparative advantages and to participate in mutually beneficial international trade.
| Apple | Orange | |
| Atlantis | 2 | 1 |
| Utopia | 3 | 6 |
- Find the country with comparative advantage in producing each of these fruits.
- Define price as the exchange ratio. If it is 1 apple = 1 orange, is trade mutually beneficial? Explain.
- If the price is 2 apple = 1 orange, is trade mutually beneficial? Explain.
- Find the price range within which trade will occur.
- Will there be trade if the production possibility set looks like the one below? Why?
| Apple | Orange | |
| Atlantis | 8 | 4 |
| Utopia | 7 | 14 |
PROBLEM 2
Suppose a few years later you become the store manager of Coles in Rundle Mall. Right across the street is Woolworths. You two stores always try to outmanoeuvre each other in pricing strategies to maximize own profits. For a specific type of food, each store can either cut the price or not. The strategic alternatives of each of you and your daily profits from selling this food are shown below (where profits of Woolworths are in italic):
| Woolworths | |||
| Cut | Not cut | ||
| Coles | Cut | 1000, 1000 | 4000, -1000 |
| Not cut | -1000, 4000 | 2000, 2000 | |
- To cut or not to cut, that is the question. What is your better strategy?
- Circle the pair(s) of strategy where there is no incentive for either of you to change strategy given no change from the competitor, which is called a Nash Equilibrium, named after the Nobel Laureate John F. Nash Jr.:
- You cut, Woolworths cuts
- You don’t cut; Woolworths cuts
- You cut; Woolworths doesn’t cut
- Neither cut
- In reality, you never know how things will look like before cutting price. So you only have this below (X is the unknown profit):
| Woolworths | |||
| Cut | Not cut | ||
| Coles | Cut | X, X | |
| Not cut | 2000, 2000 | ||
Can you think of a few food items for which X could possibly be greater than 2000?
- In your marketing practice, how can you roughly estimate the value of X in the above table? Name a few methods.
PART C: QUALITATIVE ANALYSIS (2 point each, 6 points total)
Suppose you are managing a small agribusiness in South Australia that exports cereals to Malaysia, which imports raw produce for local processing. Transportation is exclusively ocean freight which is part of your cost. For the past several years, your business has been dealing with several cereal manufacturers in Malaysia that import from multiple Australian exporters. However, a few of these manufacturers have recently merged into a large manufacturer, the domestic (Malaysian) market share of which has expanded quickly.
As the manager, you have also been doing research about other possible cereal export markets. Vietnam could be a potential one, yet market research shows that most Vietnamese people prefer traditional breakfast foods, and the “modern” breakfast consisting of cereal and dairy products has gained acceptance only among the younger generation. China could be another potential market. During the past decades, cereals and dairy products have already been popular among urban households, and market potential is huge given its population size. That said, China has a well-established domestic cereal industry, and it is difficult for foreign competitors to enter given trade barriers and cost advantages of the Chinese agricultural sector.
Answer each question BRIEFLY.
- Are Malaysian cereal manufacturer mergers good or bad for your business? Describe two possible mechanisms.
- How could decreasing fuel price affect your business? Discuss two possible mechanisms.
- Itemise the opportunities and threats of the Vietnamese and Chinese markets, respectively, based on the information above.
| Opportunities | Threats | |
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Vietnamese market
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Chinese market
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Hope you had fun. See you (but hopefully not in the same class).