Answer the following questions.How has an Act of the United States Congress increased U.S. production of corn?Why would you expect an increase in the quantity of corn produced to raise the opportunity cost of corn?Why did the cost of producing corn increase in the rest of the world?Is it possible that the increased quantity of corn produced, despite the higher cost of production, moves the United States closer to allocative efficiency? ECONOMIC ANALYSIS. Ethanol is made from corn, so biofuel and food com-pete to use the same resources.As a consequence of the Energy Policy Act 2005,which mandated a steady increase in the production ofethanol, farmers have been increasing the number ofacres devoted to corn production.In the United States, theopportunity cost of comincreased becouse theoreo plonted andproduction increased• By 2012, the amount of farmland in the United Statesdevoted to corn production had increased to its highestlevel since 1937.• Figure 1 shows the U.S. production possibilities fron-tier, PPF, for corn and other goods and services (including soybeans).PPFThe increase in the production of corn is illustrated bya movement along the PPF in Fig. 1 from point A in2010 to point B in 2012.- In moving from point A to point B, the United Statesincurs a higher opportunity cost of producing corn,as the greater slope of the PPF at point B indicates.. In other regions of the world, despite the fact that moreland was devoted to corn production, the amount ofcorn produced didn't change.- The reason is that droughts in South America and Eastern Europe lowered the crop yield per acre in thoseregions.250300360Com (milions of metric lona)400Figure 1 U.S. PPFIn the rest of the world,the opportunity cosl ofcom increased becouse..he area plantedIncreased. Figure 2 shows the rest of the world's PPF for corn andother goods and services in 2010 and 2012.- The increase in the amount of land devoted to produc-ing corn is illustrated by a movement along PPF10-- With a decrease in the crop yield, production possibili-ties decreased and the PPF rotated inward.and the yieldper acre decreasedP- The rotation from PPF10 to PPF12 illustrates this decreasein production possibilities.350400 420450500Com (millions of metric lons)Figure 2 Rest of the World PPFThe opportunity cost of producing corn in the rest ofthe world increased for two reasons: the movementalong its PPF and the inward rotation of the PPF.. With a higher opportunity cost of producing corn, thecost of both biofuel and food increases.Answer the following questions.a. How has an Act of the United States Congress increasedU.S.production of com?b. Why would you expect an increase in the quantity of comproduced to raise the opportunity cost of corm?c. Why did the cost ofproducing corn increase in therestof the world?d. Is it possiblethat the increased quantity ofcomproduced, despite the higher cost ofproduction, moves theUnited States closer to allocative efficiency?sa puo spoo6 O1o puo spoo6 o The Rising OpportunityCost of FoodU.S. Farmers' Corn Drive Set to Curtail Land for SoybeansFinancial TimesMarch 31, 2012Food commodity prices were sent gyrating after U.S. farmers signaled plans to sow the mostcorn in 75 years, leaving less land for soybeans, which are facing a fall in supplies due todroughts in South America.AU.S. government survey of 84,500 farm operators indicated they would plant 95.9m acres(38.4m hectares) with corn this spring, 4 percent more than last year, the most since 1937 andabove expectations. Plantings of soybeans, often rotated with corn, would fall 1 percent fromlast year to 73.9m acres (29.6m hectares), with declines in such fertile states as lowa, Missouri,and Nebraska.The United States is the world's leading exporter of corn and vies with Brazil in soybeanexports, so decisions made there are vital to global food markets. A growing world populationand rising incomes in emerging economies have driven greater appetites for the crops, used inproducts from pig feed to vegetable oil...."This is the annus horribilis for South American grainproduction. La Niña hit all the wrong places.." saidNick Higgins, commodity analyst at Rabobank, theDutch bank that is one of the biggest lenders to theagribusiness industry...ESSENCE OF THE STORY. U.S. farmers plan to sow the most corn in 75years, leaving less land for soybeans.· Farms will plant 95.9 million acres with corn inthe 2012 spring, 4 percent more than in 2011and the most since 1937.Corn peaked at a record of almost $8 a bushel last Juneas growers sought to meet demand from livestock pro-ducers and the U.S. ethanol industry. If farmers followthrough with planting intentions and yields are good,this year's crop could break records, helping ecase con-cerns about food prices....- Corn production in South America was hit bydrought (La Niña).- The price of corn hit a record of almost $8 abushel last June as growers sought to meetdemand from livestock producers and the U.S.ethanol industry.Copyright 2012 The Financial Times Lad. All Rights Reserved

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