The effect of changes in price of oil along with subsidy on the price of corn, wheat, and farmland.

Question

Want to see more full solutions like this?

Answer 1

Question

Chapter 12, Problem 1.1P

To determine

The effect of changes in price of oil along with subsidy on the price of corn, wheat, and farmland.

Expert Solution & Answer

Explanation of Solution

The effect of changes in price of oil along with subsidy on the price of corn is depicted in Figure 1 using the demand and supply model.

Principles of Economics (12th Edition), Chapter 12, Problem 1.1P , additional homework tip 1

In Figure 1, the horizontal axis represents the quantity of corn, whereas the vertical axis denotes the price of corn.

The effect of changes in price of oil along with subsidy on the price of farmland is depicted in Figure 2 using the demand and supply model.

Principles of Economics (12th Edition), Chapter 12, Problem 1.1P , additional homework tip 2

In Figure 2, the horizontal axis represents the quantity of farmland, whereas the vertical axis denotes the price of farmland.

The effect of changes in price of oil along with subsidy on the price of other agricultural products such as wheat is depicted in Figure 3 using the demand and supply model.

Principles of Economics (12th Edition), Chapter 12, Problem 1.1P , additional homework tip 3

In Figure 3, the horizontal axis represents the quantity of wheat, whereas the vertical axis denotes the price of wheat.

When the oil prices increase simultaneously with the rolling out of subsidy in ethanol production, the demand for ethanol will increase. As the demand for ethanol increases, the demand for corn used for its production also increases. This shifts the demand curve of corn to the right from D₀ to D₁ as in Figure 1. This increases the price of the corn.

As a result of it, the market value of farmland will increase due to the increase in demand for land as depicted in Figure 2 causing the rightward shift of the demand for land from D₀ to D₁ as in figure 2.

From now, more of the farmland would be devoted to the production of corn; less of it would be available for the production of other agricultural products such as wheat. This implies that the supply of wheat would decrease causing a leftward shift of the supply curve from S₀ to S₁ as in Figure 3, thereby increasing the price of wheat.

When the oil prices decreases, the demand for ethanol will decrease. As the demand for ethanol decreases, the demand for corn used for its production also decreases. This shifts the demand curve of corn to the left from D₁ to D₀ as in Figure 1. This decreases the price of the corn.

As a result of it, the market value of farmland will decrease due to the decrease in demand for land for corn production as depicted in Figure 2 causing the leftward shift of the demand for land from D₁ to D₀ as in Figure 2. This decreases the price of the farmland.

From now, less of the farmland would be devoted to the production of corn; more of it would be available for the production of other agricultural products such as wheat. This implies that the supply of wheat would increase causing a rightward shift of the supply curve from S₁ to S₀ as in figure 3, thereby decreasing the price of wheat.

Economics Concept Introduction

Demand: Demand is the quantity of goods and services that people are willing and able to buy at different prices in a given period of time.

Supply: Supply is the quantity of goods and services that people are willing to sell at different prices in a given period of time.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Students have asked these similar questions

In mid-2010, Saudi Arabia and Venezuela (both members of OPEC) produced an average of 8 million and 3 million barrels of oil a day, respectively. Production costs were about $20 per barrel, and the price of oil averaged $80 per barrel. Each country had the capacity to produce an extra 1 million barrels per day. At that time, it was estimated that each 1-million-barrel increase in supply would depress the average price of oil by $10. Consider the competition between Saudi Arabia and Venezuela as a game. a) Construct the payoff table. b) Do countries have a dominant strategy? c) What actions should each country take and why?

Global warming is mainly caused by Greenhouse gas (GHG) (i.e., CO2) emission. Aiming to be carbon neutral by 2060, China starts penalizing the polluting firms by introducing a specific tax to those firms. (Source: https://www.nature.com/articles/d41586-020-02927-9)Suppose you are the owner of a profit-maximizing firm in China that produces goods with carbon emission. The specific tax (with tax rate t) is imposed in proportion to the quantity of your firm’s output (q). The market of your firm’s product is assumed to be perfectly competitive. Assume there is no fixed cost: use a fully labelled diagram to show the effect of the tax on the cost curves, and briefly discuss the movement of the curves. (10 marks) Suppose China government decides to raise the tax rate. Discuss the impact of the rise on your firm's output level with economic models wherever necessary. (20 marks)

B) In his State of the Union address in 2003, President Bush supported the idea of changing from the use of internal combustion engines to fuel cells based on hydrogen as a way of reducing air pollution and the emission of greenhouse gases. Fuel cells are nonpolluting because they only emit water vapor. President Bush proposed having the government subsidize research and development of hydrogen fuel and fuel cell technology. The president did not propose raising taxes on gasoline as a way of encouraging the use of fuel cells and reducing greenhouse gases. Currently, hydrogen is more expensive than gasoline.

Answer 2