Microeconomics 200

Unit Title: Microeconomics 200

Assessment: Assignment

Student Name: Roland Lo Siew Choon

Student Number: 15109824

Student E-mail: 15109824@student.curtin.edu.au

Semester: Semester 1, 2012

Campus: Bentley

Tutor’s Name: Jaslin Kalsi

Tutorial Day and Time: Wednesday, 8.00 – 9.00 a.m.

Introduction

For the past decade, demand for biofuel had skyrocketed globally. This is attributed to causes including oil price hike, increases in environmental consciousness and implementation of government motivated policies. This essay aims to examine the impact of increased biofuel demand on producer behaviour concerning their input choices, with the analysis of changes in prices of fuel and crop on consumer behaviour in the following part. Lastly, the final part of the essay focuses on identifying appropriate government policies in resolving such issues.

Part A:

i.

As show in Figure A(i)(1), producer initially minimizes cost by producing at A with O1 and Cr1 units of oil and corn. The increases in biofuel demand will increases producer’s biofuel production, which is characterised by a shift in isoquant from Q1 to Q2. Now the firm produces at the higher isoquant, Q2, which represents a higher output level (Taylor and Akilaeerapana 2007, 238). In order to attain the higher output level, producer increases both inputs of corn from Cr1 to Cr2 and oil from O1 to O2. This results in the isocost shifting in a parallel manner outwards from C1 to C2, enabling the attainment of cost minimization at B.

Biofuel expansion is expected to increases biofuel production and subsequently demand for crops thus contributing to rises in crop’s price significantly (Rosegrant et al. 2008, 500 Figure 3).

This is shown in Figure A(i)(2), where demand curve shift rightwards from D3 to D4, moving equilibrium from A to B. Demand curve D3 represents the sum of demand arises from food consumption, D1, and from biofuel production, D2. The corns’ price...