Question

The market for corn in country A is highly competitive. At the current market price of​ $5/bushel there is a shortage of​ 100,000 bushels of corn in this country. Media reports claim that the price of corn will rise drastically in the near future. According to these​ reports, the neighboring country B had witnessed a similar situation recently. At the same​ price, the shortage in country B was also​ 100,000 bushels and eventually the equilibrium price in B went up to​ $10/bushel. Both countries are known to have equal number of corn producers and the market supply of corn is identical at all prices.​ This, combined with the fact that consumers in the two countries also have similar tastes and​ preferences, led the media to conclude that the price of corn in country A would soon be as high as​ $10/bushel.
A. Farmers will substitute the production of other agricultural goods? (like soybeans) with corn.B. Price of other agricultural goods will rise.C. The supply of corn in country A will decline in the near future.D. Demand conditions in both countries are identical.E. There are a number of substitutes available for corn in country A.

Answer 1

Answer:

The answer is: A) Farmers will substitute the production of other agricultural goods? (like soybeans) with corn.

Explanation:

When the price of a certain product increases so steeply, new suppliers will enter the market to offer their products.

Since farmers can only produce one crop at the time in a certain lot, they will always tend to produce the crop that gives them the highest profit. In this case if corn becomes very expensive, it is reasonable to assume that more farmers will produce corn by substituting others crops (like soybean or wheat).