Question

If companies decide to import cotton from other countries, what will be its impact on domestic cotton cultivation? Choose the most appropriate option:

I. Less profitable
II. More profitable
III. The price of domestic cotton will decrease
IV. The price of domestic cotton will increase

• A. Only I and IV are correct.
• B. Only I and III are correct.
• C. Only II and III are correct.
• D. Only II and IV are correct.

Hint:

Ask what extra supply does to price, and then what a lower price does to the earnings of a farmer whose costs have not changed.

Answer 1

The Correct Option is B

Concept:

• When goods are imported, the quantity available in the home market rises while the demand stays much the same.
• A larger supply at unchanged demand pulls the price down, and a lower price reduces the earnings of the domestic producer.

Step 1: Work out what happens to supply.
Imported cotton adds to the cotton already grown in the country. The total quantity available in the market therefore increases.

Step 2: Work out what happens to the price.
With more cotton on offer and no matching rise in demand, sellers have to compete for buyers. The price of domestic cotton falls.
So statement III is correct and statement IV is wrong.

Step 3: Work out what happens to the farmer.
The cost of growing cotton, that is seeds, fertilisers, labour and irrigation, does not come down. The farmer now sells the same crop at a lower price while spending the same amount on it.
Cotton cultivation therefore becomes less profitable, so statement I is correct and statement II is wrong.

Step 4: Pick the option that holds both correct statements.
Statements I and III are correct together, which is option (B).

Final Answer: (B) Only I and III are correct.