Question

10) Özgür drinks oat milk and almond milk. For him, he likes to have either a cup of oat milk or a cup of almond milk every morning. He would not drink them together (too much milk!); they are perfect substitutes. Pretend that oat milk is only made in Sweden and almond milk is only made in Iran. (Look up the countries if you don't know where they are.) a) Almond production requires a lot of water. With the recent droughts in Iran, this has resulted in a smaller harvest of almonds, and economists predict the price of almond milk will go up. Explain why this would be the case and illustrate with a graph. b) Swedish oat producers had great weather due to a warming climate, and the harvest will be exceptionally high leading to a decrease in the price of oat milk. Explain why this would be the case and illustrate with a graph. c) Ozgur drinks 5 cups of oat milk or almond milk every day. He gets equal utility either from oat or almond milk. He would gain greater utility if he drank 6 cups a day and would have less utility if he drank 4 cups. With 5 cups he is happy to have any combination of oat or almond milk. Sketch out Ozgur's indifference curves over cups of almond and oat milk. d) What are the capitals of Iran and Sweden?

Answer 1

a) Almond production requires a lot of water. With the recent droughts in Iran, this has resulted in a smaller harvest of almonds, and economists predict the price of almond milk will go up. The reduction in the supply of almond milk due to the lower harvests will shift the supply curve to the left. As a result, the price of almond milk will increase in order to balance supply and demand. The graph below illustrates this situation: b) Swedish oat producers had great weather due to a warming climate, and the harvest will be exceptionally high leading to a decrease in the price of oat milk. The increase in the supply of oat milk due to the higher harvests will shift the supply curve to the right. As a result, the price of oat milk will decrease in order to balance supply and demand. The graph below illustrates this situation: c) Ozgur drinks 5 cups of oat milk or almond milk every day. He gets equal utility either from oat or almond milk. He would gain greater utility if he drank 6 cups a day and would have less utility if he drank 4 cups. With 5 cups, he is happy to have any combination of oat or almond milk. An indifference curve is a graphical representation of Ozgur's preferences between two goods. Since Ozgur derives the same utility from drinking 5 cups of either type of milk, he must be indifferent between them. Ozgur's indifference curves will be linear and downward-sloping straight lines. The graph below illustrates this situation: d) The capitals of Iran and Sweden are Tehran and Stockholm, respectively.