Recently the government imposed a new requirement that gasoline contain 10% ethanol; the ethanol is made from corn. This new government ethanol mandate has affected the market for cereal made from corn (such as corn flakes and Captain Crunch).
a) According to the competitive market model, how does the government’s new ethanol requirement affect the equilibrium average price and quantity of cereal made from corn in the U.S.? Do corn-based cereal prices rise, or fall, or stay the same? Does the equilibrium quantity of boxes of corn-based cereal rise, or fall or stay the same? Explain your answer carefully.
b) What is the proper way to illustrate the effect of the government’s ethanol requirement on the corn-based cereal market? (Does the demand curve shift up/right, or does the demand curve shift down/left, or does the supply curve shift up/left, or does the supply curve shift down/right?