Consider the market for feed corn, like no. 2 yellow corn. Keep in mind that this commodity can not only be feed to animals but also used to produce...

2.     Consider the market for feed corn, like no. 2 yellow corn. Keep in mind that this commodity can not only be feed to animals but also used to produce ethanol.

a.     Draw the diagram representing market equilibrium in the market for corn; also draw the diagram representing the profit maximizing quantity and price for an individual farmer producing corn. (10 points)

b.    Assume policymakers pass a law requiring that all gas sold in the United States contain at least 15 percent corn-based ethanol[1]. Graphically illustrate the short-run effects of this law. In particular, show how the law would affect:

* Label the new curves and equilibrium values using a subscript 2.

• the short-run equilibrium in the market for corn,

• the short-run demand curve faced by the representative firm, and

• the representative firm's short-run profit-maximizing level of output.

What can you say about short run profits? (15 points)

c.     Next, graphically illustrate how, after the initial changes you illustrated in question 7, the corn market and the representative firm would adjust back to long-run equilibrium. Label any new curves and equilibrium values using a subscript 3. After all adjustments have taken place, what has happened to the equilibrium market price, the number of firms operating in the market, and the representative firm's profits? Why?  (10 points)