Apple Farmer and Pie Chain Economics

The video discusses the challenges faced by an apple farmer and a pie chain due to fluctuating apple prices. The unpredictability of prices causes financial instability for both parties. To mitigate this, they can use a forward contract, agreeing on a fixed price for apples, ensuring stability and predictability. This contract benefits both the farmer and the pie chain by reducing volatility and securing profits.

What is the main issue faced by the apple farmer each year?

• High transportation costs

• Poor weather conditions

• Price volatility of apples

• Lack of labor

How does the pie chain react when apple prices are high?

• They make more profit

• They stop buying apples

• They run at a loss

• They increase production

What solution do the apple farmer and pie chain consider to manage price unpredictability?

• Increasing production

• Finding new markets

• Entering a forward contract

• Reducing costs

What is a forward contract?

• A future transaction agreement at a specified price

• A marketing strategy

• A type of insurance

• A loan agreement

What is the agreed price per pound in the forward contract?

• $0.25

• $0.20

• $0.10

• $0.30

How does the forward contract benefit the pie chain?

• It allows them to buy more apples

• It ensures a stable price for budgeting

• It reduces their production costs

• It increases their market share

What obligation does the farmer have under the forward contract?

• To sell apples at market price

• To find new buyers

• To deliver one million pounds of apples

• To reduce apple production

Why is the forward contract advantageous for the farmer?

• It allows for higher profits

• It provides price stability

• It increases apple quality

• It reduces labor costs

What is the total amount the pie chain agrees to pay under the forward contract?

• $100,000

• $250,000

• $150,000

• $200,000

What is the main benefit of the forward contract for both parties?

• Increased profits

• Reduced production costs

• Access to new markets

• Avoidance of market volatility