This is the latest in our series of posts in our series on price theory problems with Professor Bryan Cutsinger. You can see all of Cutsinger’s problems and solutions by subscribing to his EconLog RSS feed. Share your proposed solutions in the comments. Professor Cutsinger will be present in the comments for the next couple of weeks, and we’ll post his proposed solution shortly thereafter. May the graphs be ever in your favor, and long live price theory!
Question: Consider the markets for fresh vegetables and instant noodles. Assume that fresh vegetables are a normal good, while instant noodles are an inferior good. Suppose Congress bans a commonly used fertilizer and pest-control chemical in vegetable farming. Without this input, vegetable yields fall and there is increased spoilage from pest damage.
(a) Using a supply and demand diagram, explain how this policy affects the equilibrium price and quantity of fresh vegetables.(b) Explain how the higher price of vegetables affects real household purchasing power.(c) Taking into account that vegetables are a normal good and instant noodles are an inferior good, explain how the policy affects the demand for each good.(d) Using a supply and demand diagram, show the resulting change in the equilibrium price and quantity of instant noodles.(e) What is the unintended consequence of this regulation for people’s diets?
