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

The cross-price elasticity between tomatoes and most other substitute vegetables is very low, leading to an increase in revenues for farmers despite the frost destroying the tomato crop in California.

Step-by-step explanation:

The best explanation for an increase in revenues for farmers despite a frost destroying the tomato crop in California is d) The cross-price elasticity between tomatoes and most other substitute vegetables is very low.

This means that even though the tomato supply has decreased due to the frost, the demand for substitute vegetables such as cucumbers, peppers, or lettuce is also inelastic, meaning that consumers are not easily substituting tomatoes with other vegetables. As a result, the prices of these substitute vegetables may not increase significantly, allowing farmers to increase their revenues despite the tomato crop loss.

This situation is similar to the example of coffee mentioned in Figure 5.8 (a) where a major frost hit the Brazilian coffee crop and the supply of coffee shifted to the left, leading to much higher prices due to the inelastic demand for coffee.