In 2010, 40% of all U.S. corn production was used for producing ethanol, while 60% was used for consumption in or as food products. In 2011, a prolonged drought reduced the overall production of corn by 30%, from 10 million bushels to 7 million bushels. Currently, 2.8 gallons of ethanol can be produced from one bushel of corn. In reaction to both the losses in overall production and increasing demand, the U.S. Department of agriculture mandates that all corn producers now must use 50% of their crop for ethanol production.
Review and answer the following questions.
What are some of the primary obstacles to efficiency of U.S. corn production?
Before the mandate, what was the opportunity cost of ethanol in terms of bushels of corn? After? What was the opportunity cost in 2010?
Was the market for corn and ethanol more efficient before or after the mandate? Why or why not? What components make for an efficient allocation?
How do you think a government subsidy of $0.99 per gallon of ethanol would affect current production level on the PPF?
What methods or actions, in light of the 30% decrease in corn production for 2011, do you think could be used to return the PPF to its former level in 2010 (10 million bushels/year) or greater?