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How anti-pollution policy (ethanol) affects markets.

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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.

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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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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 ...

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