Question - The table below represents the world supply and demand for natural vanilla in thousands of pounds. A large portion of vanilla is grown in Madagascar and comes from orchids that require a lot of time to cultivate. The sequence of events described below actually happened, but the numbers have been altered to make the calculations easier (See James Altucher, "Supply, Demand and Edible Orchids," Financial Times, September 20, 2005, p.12). Assume the original supply and demand curves are represented in the table below.
|
Price ($/pound)
|
Qty Demand
|
Qty Supply
|
|
0
|
20
|
0
|
|
10
|
16
|
6
|
|
20
|
12
|
12
|
|
30
|
8
|
18
|
|
40
|
4
|
24
|
|
50
|
0
|
30
|
a. Graph both the supply (label SO) and demand (label DO) curves. What is the current equilibrium price? Label that point a.
b. Assume Madagascar is hit by a hurricane (actually occurred in 2000), and the world's supply of vanilla is reduced by 5/6 or 83%. Label the new supply curve Si. What will the new equilibrium price be in the market? Label that point b.