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How anti-pollution policy (ethanol) affects markets.

Question 1: Some states are requiring that ethanol be mixed with gasoline to comply with anti-pollution laws. Ethanol can be made from corn. What effect are these policies having on the equilibrium price and quantity of corn?

Question 2: Corn is a key input in the poultry, dairy, hog, and cattle industry. What effect has the sharp increase in the price of corn had on these industries?

Please use supply/demand graphs to analyze shifts in supply and demand and the resulting changes in market equilibrium in the situations described in Questions 1 and 2. Show the shifts of either demand or supply curves.

Illustrate graphically how the event described in Question 1 affects the equilibrium price and quantity of corn.

Illustrate graphically how the event described in Question 2 affects the industries.

Solution Preview

Please see attached document for full explanation and graphs.

Supply and Demand
Question 1: Some states are requiring that ethanol be mixed with gasoline to comply with anti-pollution laws. Ethanol can be made from corn. What effect are these policies having on the equilibrium price ...

Solution Summary

The problem looks at the relationship between policy and the effect on seemingly unrelated markets. I begin by showing the effect that requiring ethanol in fuel has on the corn market. I then show how industries that use corn as an input are affected. I provide both verbal and graphical explanations.

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