1.In 2005, the U.S. government passed a law mandating increased use of ethanol as a vehicle fuel. As most ethanol is made from corn, this mandate made corn farming more attractive. This question asks you to consider how the increased demand for corn affects corn farmers in the Midwestern United States. There are many farmers in this region, so that the market is perfectly competitive. (3 points)

a)Suppose that, before policies supporting corn-based ethanol were enacted, the corn market was in long-run equilibrium. Using two diagrams, one to represent the market for corn, and a second to represent the costs of a typical farm, illustrate the price, quantity, and profits of a typical farm in long-run equilibrium. Briefly explain why you have drawn the curves as you did.

b)Redraw your graph from part (a). Show how the corn market responds in the short-run after the new law increasing the use of ethanol passes. How does the market equilibrium and profits of a typical corn farmer change in the short run? Explain briefly.

c)Suppose that there is plenty of land available for farming in the Midwest. How will the market respond in the long run? Once again using separate diagrams for both the industry and a typical farm, illustrate the new long run equilibrium for the corn market. What happens to the market equilibrium price and quantity of corn in the long-run?

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