In the context of microeconomics, what effect will a drought most likely have on farmers' revenues?

• A. Farmers' revenues will always decrease because less output is produced and sold.
• B. Farmers' revenues will increase because droughts always improve crop quality.
• C. Farmers' revenues will remain unchanged since demand for agricultural products is perfectly elastic.
• D. Farmers' revenues may increase if the reduction in supply leads to a higher market price that outweighs the decrease in quantity sold.

Answer: (D)

Verified step by step guidance

1. Step 1: Understand the relationship between supply, demand, and revenue. Revenue is calculated as \(\text{Revenue} = \text{Price} \times \text{Quantity}\) sold.
2. Step 2: Recognize that a drought reduces the supply of agricultural products, shifting the supply curve to the left, which typically decreases the quantity available in the market.
3. Step 3: Analyze how the reduction in supply affects the market price. With less supply and unchanged demand, the price of agricultural products tends to increase.
4. Step 4: Consider the net effect on revenue by comparing the increase in price to the decrease in quantity sold. If the price increase is proportionally larger than the quantity decrease, total revenue may increase.
5. Step 5: Conclude that farmers' revenues may increase or decrease depending on the relative changes in price and quantity, so it is not always true that revenues will decrease after a drought.