Question

Suppose a frost destroys the tomato crop in California but farmers see an increase in their revenues. Which of the following best explains this? a) Tomatoes are necessities. b) The decrease in supply led to huge price increases. c) The demand for tomatoes is price inelastic d) The cross-price elasticity between tomatoes and most other substitute vegetables is very low

Answer 1

Answer:

b) The decrease in supply led to huge price increases.

c) The demand for tomatoes is price inelastic

Explanation:

If the quantity supplied decreased dramatically due to the frost, but total revenue earned by farmers increased, that can only mean that the price of tomatoes skyrocketed. And not only that, consumers must have been willing to pay for the expensive tomatoes.

Both conditions must be met in order for total revenue to increase given a sharp decrease in the quantity supplied.

Answer 2

Answer:

B. The decrease in supply led to huge price increases

Explanation:

A decrease in the amount of available goods generally leads to increase in demand which in turns lead to increase in prices. Since frost destroys tomatoes crops in California, we can infer than the supply of tomatoes decrease drastically. But then the farmers revenue increased, implying that a decrease in the availability of tomatoes lead to the increasd in the prices of tomatoes which leads to increase in the farmers revenues.

It is important to note than tomatoes being price inelastic and necessity can also explain why the revenues increases as increase in prices would see customers maintain the amount of tomatoes they buy, but doesn't explain the scenario as much as "decrease in supply leading to huge prices increases".