Question

The market for corn is initially in equilibrium. Suppose that the production of biofuels, which use corn as an input, increase, and at the same time, increases in the price of oil cause farm production costs to rise. Which of the following explains the effect on equilibrium price and quantity in the corn market?

A. The price and quantity of corn will rise.
B. The quantity of corn will rise​, but the effect on equilibrium price cannot be determined without more information.
C. The quantity of corn will fall​, but the effect on equilibrium price cannot be determined without more information.
D. The price and quantity of corn will fall.
E. The price of corn will rise​, but the effect on equilibrium quantity cannot be determined without more information.

Answer 1

The correct answer is option E.

Step-by-step explanation:

The market for corn is assumed to be in equilibrium. Now, we know that corn is used as an input in biofuels. As the production of biofuels increases the demand for inputs will increase as well. An increase in the demand will cause the demand curve to shift. This will cause the price to increase.

An increase in the cost of production will cause a reduction in price. The change in equilibrium quantity depends on the degree of change in the supply. If the change in supply is equal to the change in demand, the equilibrium quantity will remain the same.

So, we need more information to say anything about the change in quantity.