Reference no: EM131163933
Ethanol is an environmentally friendly, alcohol-based alternative fuel produced from corn and other crops that contain starches. Several states have passed legislation that requires gas stations to sell a mixture of gasoline and ethanol. As the demand for ethanol and corn increases, so does the price of corn. With refiners hogging corn supplies, real hogs have felt the impact. Corn has long been a staple of the pig diet. But soaring corn prices—in December 2011 a bushel of corn cost nearly $6, more than double the price of a few years before—have caused many farmers to turn to a cheaper alternative: junk food! Apparently, pigs have a real sweet tooth. “Pigs can be picky eaters, but they like the sweet stuff” noted Alfred Smith, a North Carolina pig farmer.
a. On two separate graphs draw the market for corn and the market for junk food. Assume that the initial price of corn is $3 per unit and the initial price of junk food is $4 per unit. Label the equilibrium price and the equilibrium quantity on each graph.
b. On your graph for corn, show what happened in the corn market when the states passed legislation that required gas stations to sell an ethanol-gasoline mixture. i. Is there a shortage or surplus at the original price? Explain. ii. On your graph identify the new equilibrium price of corn ($6) and the equilibrium quantity.
c. According to pig farmers, what is the relationship between junk food and corn?
d. On your graph for junk food, show what happened in the junk food market when the price of corn increased. What has happened to the price of junk food and the quantity of junk food consumed? Is this a violation of the law of demand? Why or why not?
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