CFA Level I · CFA Level I Exam · Natural Resources
A sudden drought sharply reduces the wheat harvest in a major exporting country. In the short run, the price of wheat is most likely to rise by a large amount relative to the fall in supply because:
Wheat prices jump because short-run supply and demand are both inelastic. Producers cannot quickly replace a lost harvest and consumers cannot easily substitute, so a modest supply fall requires a large price rise to clear the market.
- Awheat storage costs are always negative
- Bsupply and demand for wheat are both relatively inelastic in the short runCorrect
- Cproducers can immediately plant additional crops
Explanation
Crop supply cannot adjust quickly within a growing season and consumers have few substitutes for staples, so both curves are inelastic and a supply shock causes a large price move. Planting more cannot offset a lost harvest immediately, and storage costs are positive.
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