Writing Assignment and Critical Thinking Problems:

This assignment is worth 100 points toward your overall course average. The criteria used to grade this assignment includes the professional appearance of the document you submit, your ability to use the principles of supply and demand to critically assess the impacts, and your ability to explain your conclusions in writing. Each part can be answered in one page or less.

You will email your assignment in Canvas. Before you email your assignment, make sure your name is on your paper AND your full name is included in the electronic file name. For example, filename:

Jose Sanchez_Econ252_paper.doc

I will not read your work if your name is not in the electronic filename.

Assignment:

Answers to all parts shall be completed in a Microsoft Word document. Begin by copying the Scenario below and then, for each part, copy the problem before completing your answer. You may want to draw your diagrams in Microsoft PowerPoint or other software and then copy and paste the diagram into the Word document as a "Picture (Enhanced Metafile)" using the "Paste Special" feature in Word.

The document you turn in should be six (6) pages long. For the first page include a short title for this assignment, the course name and number, your name, and then copy and paste everything below beginning with "Scenario" onto your first page. The 2nd page of your document should include the description of Part 1 and then your diagram and answer. Do the same for Parts 2-5, with each part on a separate page.

Scenario:

The Federal Government implemented a policy some years ago to subsidize the production of ethanol fuel at 46 cents per gallon. See news article here:http://usnews.nbcnews.com/_news/2011/12/29/9804028-6-billion-a-year-ethanol-subsidy-dies-but-wait-theres-more?lite

Ethanol is an alternative fuel (a substitute for regular gasoline) that can be used in some models of automobiles designed to burn any mix of gasoline up to 85% ethanol (fuel is known as E85, and auto manufacturers label these vehicles as "FlexFuel" and similar names). A primary input in the production of ethanol is corn. For the purposes of this assignment, assume that all relevant markets are perfectly competitive.

Part 1: Show geometrically using the supply and demand curves the impact the subsidy had in the ethanol market (hint: the result has been a reduction in the market price of ethanol). Fully explain the impact of the production subsidy in terms of the behavior of producers (sellers) in the market and customers (buyers) in the market and what has happened to equilibrium price and quantity in the market for ethanol.

Part 2: Show geometrically using the supply and demand curves what impact the reduction in market price for ethanol had in the market for regular gasoline. Fully explain the impact this reduced ethanol price had on the customer demand for regular gasoline.

Part 3: Show geometrically using the supply and demand curves the impact due to the change in the equilibrium quantity in the market for ethanol had in the market for corn. Fully explain the impact and the resulting equilibrium price and quantity for corn.

Part 4: Show geometrically using the supply and demand curves what impact the change in the market price of corn had in the market for manufactured corn tortillas (assume that the market for corn tortillas is perfectly competitive). Corn tortillas are a staple food item in the diets of millions of families across the U.S..Fully explain the impact of change in the market price of corn in terms of the behavior of producers (sellers) in the market and customers (buyers) in the corn tortilla market.

Part 5: Show geometrically using the supply and demand curves the impact in the ethanol market when the ethanol subsidy ended on Jan. 1, 2012. Give one possible explanation why I can no longer find E85 fuel at gas stations. Hint: When the subsidy still existed, the market price of E85 was about 30 cents a gallon less than regular gasoline. E85 is not a perfect substitute for regular gasoline because the performance is less and gas mileage drops by 5-7 miles per gallon.