Question 13An increase in the price of corn, an input in the production of ethanol, will _________ the market price and ________ the market quantity of ethanol.1 pointIncrease; increaseIncrease; decreaseNone of the other choices is correct.Decrease; increaseDecrease; decrease
Question
Question 13An increase in the price of corn, an input in the production of ethanol, will _________ the market price and ________ the market quantity of ethanol.1 pointIncrease; increaseIncrease; decreaseNone of the other choices is correct.Decrease; increaseDecrease; decrease
Solution
The correct answer is "Increase; decrease".
Here's why:
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An increase in the price of corn, which is a key input in the production of ethanol, will increase the cost of producing ethanol.
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According to the law of supply, if the cost of production increases, the suppliers will reduce the quantity they supply unless they can pass on the increased cost to consumers.
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Therefore, the market price of ethanol will increase as suppliers try to pass on the increased cost of production to consumers.
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However, the higher price will reduce the quantity of ethanol that consumers are willing to buy, according to the law of demand.
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So, the market quantity of ethanol will decrease.
Therefore, an increase in the price of corn will increase the market price and decrease the market quantity of ethanol.
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