Question

The year 2014 was a perfect storm in the hazelnut industry: terrible weather and blights reduced crops. People in China started eating large numbers of hazelnuts, and recent information on the health benefits of these nuts increased domestic demand. Not too surprisingly, the price of hazelnuts has increased over 60%.

a.) Hazelnuts are a key ingredient for Ferrero's Nutella. In a graph draw the cost curves for ferrero's nutella production before and after the rise in hazelnut prices.

b.) There were no such changes in the production of peanuts during 2014. If peanut butter is an excellent substitute for Nutella, what is likely to happen to the price of Nutella given the rise in the cost of hazelnuts? Use a supply and demand curve graph to explain your answer.

c.) A local news reporter interviewed a hazelnut farmer about the effect of increased Chinese demand for hazelnuts. The farmer said "... nothing much is going to happen. They want more nuts, but the pressure on prices will just lower the demand again." Using a demand and supply graph for the market for hazelnuts, assess this farmer's sentiments.

Answer 1

Cost Curve for Nutella Before &After Rise in Prices 3000 2500 2000 1500 1000 500 10 12

Orange-After rise in Prices Blue-Before Change in Prices

b)Since Nutella and Peanut Butter are perfect substitutes, a rise in prices of Hazelnuts will make production more expensive for Nutella and Hence it will become more expensive.This will make Peanut Butter relatively cheaper and demand would shift to peanut butter causing a decrease in the demand for Nutella.

Price Q, 0 Quantity

c)

Price 0 Quantity

The above graph can be used to explain the Farmer's sentiment.Since hazelnuts have become more expensive,Nutella becomes more expensive and since peanut butter is a perfect substitute supply is likely to decrease for Nutella causing a further pressure on prices and lowering the demand.