Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Producers will exit the market, causing prices to rise further.
B
New producers will enter the market, increasing supply.
C
Average total costs will decrease for all producers.
D
The demand curve will shift left, reducing prices.
Understanding the Answer
Let's break down why this is correct
Answer
When there is a sudden increase in demand for ethanol, which is made from corn, the price of corn will rise because more people want to buy it. This higher price encourages farmers to grow more corn since they can earn more money. Over time, as more corn is produced, the supply in the market will increase. Eventually, this increase in supply will help stabilize the price of corn, leading to a new long-run equilibrium where the price is higher than before, but not as high as immediately after the demand spike. For example, if corn was $3 per bushel before the demand increase, it might rise to $5 initially, but after farmers adjust and increase production, it could settle at around $4 per bushel in the long run.
Detailed Explanation
When corn prices go up, more farmers want to grow corn. Other options are incorrect because Some might think that higher prices will scare farmers away; It's a common mistake to think that all costs go down when prices rise.
Key Concepts
Market Equilibrium
Supply and Demand Dynamics
Profit Maximization
Topic
Market Dynamics in Agriculture
Difficulty
medium level question
Cognitive Level
understand
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