Question

Given what you know about the relationship between corn and beef and corn and soybeans and corn and gasoline, determine the impact of an increase in the price of corn (due to a new insect that eats the roots out of corn) on soybeans, beef, and gasoline.

Answer 1

Corn is used to feed cattle, therefore, an increase in the price of corn will result in an increase in the price of beef. This should result in a decrease of the quantity demanded of beef.

Corn is used to produce biofuels that are added to gasoline, therefore, an increase in the price of corn will result in an increase in the price of gasoline. An increase in the price of gasoline should decrease the quantity demanded (since gasoline's PED is very low, the decrease will probably be minuscule).

Since corn and soybeans are substitutes, an increase in the price of corn will increase the quantity demanded of soybeans.