Question

(d tion crackdown. P Problems 10 and 11. Big drops in prices for crops make it tough down on the farm Corn, soybean, and wheat prices have fallen roughly 50 percent from the historic highs of earlier this year. With better-than-expected crop yields, world grain pro- duction will rise nearly 5 percent this year. Grain prices have also become more closely tied to oil prices because of the growing corn-based ethanol industry. Source: USA Today, October 23, 2008 Why did grain prices fall in 2008? Draw a graph to show the short-run effect on an individual farmer 's economic profit. 11. Explain the effect of a fall in the oil price on the market for ethanol. If the price of oil remains low for some years, what will be the long-run effects on the market for ethanol and the number of ethanol producers?

Answer 1

10. Grain prices fell in 2008 due to better than expected field produce, which increases the supply of food yield , shifting the supply curve to the right, leading to a fall in market prices of crops. the required graph is below:

Price Demand S2 Е. P, 1 Р, '2 2 Quantity Q, о, S. ш

11. Since oil is used to produce ethanol, a fall in the price of oil will reduce the input cost of production of ethanol, leading to an increase in the the supply of ethanol in the market (as firms produce and supply more ethanol in order to make more profits). In the long run, due to low prices and low profits, existing producers in the ethanol market would start exiting the market, thereby pushing the ethanol prices up back again.