2.6 Elasticity of supply questions for IB Economics

Explain why the law of diminishing marginal returns limits how far farmers can increase output on a fixed area of land in the short run.

Using real-world examples, evaluate the view that improvements in agricultural technology are the most effective way to increase the supply of food in ELDCs.

Define the term free market economy indicated in bold in the text (Text A, paragraph 2).

Using information from Text A, paragraph 2, calculate the percentage change in the price paid to farmers for cashew nuts between 2020 and 2024.

Using your answer to (b)(i) and information from Text A, paragraph 2, calculate the price elasticity of supply (PES) of cashew nuts.

Using your answer to (b)(ii), state whether the supply of cashew nuts is price elastic or price inelastic.

Using a demand and supply diagram, explain how the abolition of the marketing board led farmers to increase the quantity of cashew nuts supplied (Text A, paragraphs 1 and 2).

Using information from the text/data and your knowledge of economics, discuss the strengths and limitations of a market-oriented approach to agricultural development in Kaldoria.

Using Table 1, calculate the marginal product of the third bag of fertilizer.

Using Table 1 and the information provided, calculate the marginal cost per tonne of the extra tomatoes produced by the fourth bag of fertilizer.

The price farmers receive for tomatoes is VRD 160 per tonne. Using your answer to (a)(ii) and Table 1, determine how many bags of fertilizer per hectare a profit-maximizing farmer would apply, and explain why.

Show that, if the price of tomatoes rose to VRD 320 per tonne, a profit-maximizing farmer would increase the quantity of tomatoes supplied from each hectare.

Tomatoes in Veruna are grown in three regions. The quantities supplied at different prices are shown in Table 2.

Table 2: Quantity of tomatoes supplied per year (thousand tonnes)

Using Table 2, calculate the price elasticity of supply (PES) of tomatoes in Veruna when the price rises from VRD 240 to VRD 320 per tonne.

Using a diagram and the information provided, explain why the supply of tomatoes in Veruna is price inelastic.

In 2025 the price of imported fertilizer in Veruna rose by 50 % because of higher shipping costs. At the same time, about 8 % of the island's farmland was sold to developers to build hotels for the growing tourism industry.

Sketch a demand and supply diagram to show the effect of these changes on the market for tomatoes in Veruna.

Using the information provided, explain two reasons why the changes in 2025 reduced the supply of tomatoes in Veruna.

The government of Veruna is considering the following options to increase the domestic supply of tomatoes:

• A subsidy on fertilizer of VRD 100 per bag. It would cost about VRD 6 million a year. Some economists warn that heavy fertilizer use is already polluting the island's coastal waters, which are important for tourism and fishing.

• Grants for greenhouses and drip irrigation, covering half the cost. Greenhouses can more than double yields per hectare, but take two years to build and are affordable mainly for larger farms, even with the grant.

• Planning rules protecting farmland from hotel development. The tourism ministry argues that this would limit job creation in the island's fastest-growing industry.

• Removing the 30 % tariff on imported tomatoes. Imports would increase supply in the shops but would reduce the incomes of local farmers; imported tomatoes are often damaged in transit.

• An agricultural extension service to train farmers in soil testing and efficient fertilizer use. Trials suggest yields rise by about 10 % within two seasons.

Using the information provided and your knowledge of economics, recommend a policy that the government of Veruna could introduce to increase the domestic supply of tomatoes.

Explain how a rise in the income that owners can earn from short-term holiday lettings may affect the supply of long-term rental housing.

Using real-world examples, discuss the view that rent controls are the most effective way to make rental housing more affordable.

Define the term competitive supply indicated in bold in the text (Text A, paragraph 3).

Using information from Text A, paragraph 2, calculate the price elasticity of supply (PES) of avocados in Valcarra.

Using your answer to (b)(i), state whether the supply of avocados is price elastic or price inelastic.

Using a demand and supply diagram, explain why the price of Valcarran coffee beans has risen (Text A, paragraphs 3 and 4).

Using Table 1, calculate the price elasticity of supply (PES) of Mavora's vanilla between 2022 and 2023.

Assuming that all of Mavora's output is exported at the world price, calculate the percentage change in Mavora's export revenue from vanilla between 2019 and 2024.

Using Table 1, outline why Mavora's output of vanilla continued to rise between 2019 and 2022, even though the world price was falling.

Natural vanilla faces competition from synthetic vanillin, a flavouring made in chemical plants from petrochemicals or wood pulp. Vanillin producers in several countries can raise output within weeks when its price rises. Food manufacturers that label their products as containing "natural vanilla" cannot switch to vanillin, and the price elasticity of demand (PED) for natural vanilla is estimated at −0.3.

Explain two reasons why the PES of natural vanilla is lower than the PES of a manufactured flavouring such as synthetic vanillin.

Using a demand and supply diagram and the information provided, explain why the 2017 cyclone led to a large rise in the world price of vanilla.

In 2025 the government of Mavora is considering a minimum export price of US$100 per kg. It would buy, at this price, any vanilla that exporters could not sell abroad. At US$100 per kg, farmers are expected to supply 1 700 tonnes a year.

Using the PED of −0.3, calculate the percentage change in the quantity of Mavora's vanilla demanded by foreign buyers if the price rises from the 2024 level of US$60 per kg to US$100 per kg.

Using your answer to (a)(vi) and Table 1, calculate the cost to the government of buying the surplus of vanilla at the minimum export price (in US$ million).

Outline why the cost to the government of the minimum export price is likely to rise over time.

The government is considering several ways to support vanilla farmers:

• Minimum export price: a guaranteed price of US$100 per kg, with the government buying any surplus (see (a)(vi)–(a)(viii)). The government's budget deficit is already 6 % of GDP.

• Price stabilization fund: a levy of 10 % on vanilla exports in years when the world price is above US$300 per kg, used to pay farmers a top-up when the price is below US$150 per kg. The fund would take several years to build up.

• Farmers' cooperatives: grants and loans to cooperatives to build curing and storage facilities, so that farmers can hold cured beans for up to two years and sell when prices recover. A development bank has offered a loan of US$15 million.

• Diversification: training and grants to help farmers grow other crops such as cloves and pepper, or to work in tourism, where visitor numbers are rising by 8 % a year.

• Quality certification: a traceability scheme to stop the theft of green beans, which leads farmers to pick early and lowers the quality and price of Mavora's vanilla.

Using the information provided and your knowledge of economics, recommend a policy the government of Mavora could introduce to stabilize the incomes of vanilla farmers.