Goolsbee1e_Solutions_Manual_Ch14 - General Equilibrium 14 1 Peanut butter has always been thought to be a delicious wholesome food That is until the FDA

Goolsbee1e_Solutions_Manual_Ch14 - General Equilibrium 14 1...

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SolutionSolution 1. Peanut butter has always been thought to be a delicious, wholesome food. That is, until the FDA releases its Food Defect Guidelines that set maximum allowable amounts of rodent excreta that may be present in every jar (surprisingly, the maximum is not zero!). Following this release, the demand for peanut butter falls.a. What is the immediate effect on the price of peanut butter and the quantity consumed?b. Peanut butter and jelly are complements. What is the residual effect on the price of jelly?c. What effect does the change in the price of jelly you indicated in part (b) have on the demand for pea-nut butter?d. Does the demand effect you indicated in part (c) tend to push peanut butter prices and quantities back toward their original values, or farther away from them? 2. Following a renewable fuels mandate in 2005, the demand for yellow corn, the key ingredient in ethanol, skyrocketed.a. What is the immediate effect of the increase in demand on the price and quantity of yellow corn?b. Yellow corn and white corn (the key ingredient in corn tortillas) are substitutes in production. As a result of the changes in the market for yellow corn, what happens to the supply of white corn?c. How does the changing supply of white corn affect its market price?d. As the price of white corn changes, what effect does that change have on the supply of yellow corn? Indicate the likely effects on both the price and quantity of yellow corn produced.e. Does the change in the price of white corn tend to push yellow corn prices and quantities back toward their initial values, or farther away from them?
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