Use the information above sketch a model of how the market for pomegranates in Country A and in Country B would respond to the supply volatility in each country. Then, use your findings to plot the price of pomegranates across time in Country A and Country B. Explain which country will see more volatile prices and why.
Consider the demand for pomegranates in two different countries. In Country A, pomegranates are a critical part of the diet and are central to preparation of many recipes. For most of these recipes, there is no feasible substitute for pomegranates. In Country B, households will purchase pomegranates if the price is right, but consumers do not consider them to be particularly special or unique, and few dishes use pomegranates. Suppose pomegranates are native to both countries and due to limited shipping options are not traded. Also suppose that droughts and other weather-related shocks periodically cause unexpected changes in supply conditions.
Use the information above sketch a model of how the market for pomegranates in Country A and in Country B would respond to the supply volatility in each country. Then, use your findings to plot the price of pomegranates across time in Country A and Country B. Explain which country will see more volatile prices and why.
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