Question

1. Draw the supply and demand for wheat on a graph, and indicate the equilibrium price and quantity. Suppose rice and wheat are consumption substitutes, and corn and wheat are production substitutes. Describe and show what happens in the market for wheat when 2 events occur at the same time: 1) the price of corn increases, and 2), a drought (lack of rain) occurs in rice-growing regions, causing the supply of rice to fall.. Suppose the drought in rice has a bigger magnitude impact on the market for wheat. than the price of corn increasing. Show the appropriate curve shifts in the market for wheat and indicate the new equilibrium price and quantity.

2. Draw a supply and demand graph for corn tortillas, and indicate the equilibrium price and quantity. Now suppose the government sets a price ceiling below the equilibrium price of tortillas. Show the shortage and shade in the producer and consumer surplus, and also the deadweight loss. If the price of corn (an input) rises, with the price ceiling in tortillas still in effect, what happens in the market for tortillas? Use a dashed line to show the change in the appropriate curve, and indicate whether the shortage in tortillas increases or decreases

Answer 1