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Micro economic - Assignment Example

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Micro economic assignment
Part A Your first task is to use models and concepts relating to producer behavior to analyze the effects of increased demand for bio-fuels on the inputs to its production (including crops, such as corn)…
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Micro economic

Download file to see previous pages... From the Isocost Isoquant analysis graph above, we assume that corn (C) and Oil (O) are utilized in the production of biofuels (B). Therefore, the production function for biofuels will be represented by B= f(C, O). In the graph, the prices of oil and corn have been represented by PO and PC respectively. Figure 2: Equilibrium Price and Quantity in the Market for Corn .High Isocost and Isoquant curves results when the demand of biofuels increases which results in an increase in production levels of biofuels. For the production of biofuels to be effected, corn has to be used. Since, increased biofuels demands imply increased production of biofuels, it is right to say that the demand for corn will also increase significantly. Consequently, the demand that arises from the production of biofuels and that of food consumption would be compromised as depicted in figure 2 with D2 and D1 respectively. The result ripple effect will, therefore, mean that the price of corn will increase thereby leading to a reduction in the consumption of corn as food. Many people will, therefore, opt for alternatives or substitutes since there will be reduced food availability. An isoquant is a curve that combines factors that are employed in production to arrive at the same output level. The isoquant has no effects in the changes of input prices. Every isoquant shows an output level. Isoquants of Higher levels show high output level (Baumol and Blinder 2011). An isocost line on the other line combines various factors, which are same in cost (Baumol and Blinder 2011). That why it is a straight line. The intercepts represent the amount of units of input which can be employed when it is the only purchased factor in a budget. The slope gives the price. The higher the line means that a higher cost is incurred. Therefore, the increase in prices of corns leads to a movement of the isocost line along the x axis towards the origin. Given a constant budget the quantity of corn can only be reduced. This will lead to a change in the isocost lines. This will further lead to a rise of isocost line along conventional axis. ii. Analyze how developments in agricultural and conversion technology might influence the impacts identified in Part A (i). To counter the effects caused by increased demand for biofuels, increased conversion technology and agricultural productivity as well as use of Agricultural biotechnology and second generation biofuels would suffice (Zilberman, et al. 2008). Changes in technology are internal or depend on the economic conditions. An economy that opts to move away from inputs that cost much can always adopt technology changes. It is a mechanism that solves the increased cost of input problems. In the situation of increased costs of corn, there can be an adoption of technology to deal with the problem. Changes in technology will lead to reduction of quantity of input that is needed and, therefore, reduce the costs that are involved. The output level will increase with the same cost constraint. Therefore, the supply will increase hence the demand will fall (Rubinstein 2006). iii. Analyze the effects of increased competition between participants in the oil market on the impacts identified in Part A (i). In case, there is increased competition in the market of oil ceteris paribus; the prices of oil are bound to fall. If the prices of oil fall, it means that the prices of inputs will drop as oil is the input used in production of biofuels. Therefore, using the same cost allocated for production the ...Download file to see next pagesRead More
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