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Figure 15.1 General Equilibrium Effects in Corn and Wheat Markets
(a) Before the renewable fuels mandate, the corn market is in equilibrium at (Qc1, Pc1), where the initial demand curve Dc1 and supply curve Sc1 intersect. The direct effect of the renewable fuels mandate shifts demand out to Dc2. Because the mandate also increases the price of wheat, however, the demand for corn continues to shift out until general equilibrium is reached at (QcF, PcF), where DcF intersects Sc1.(b) Wheat, a substitute good for corn, is at an initial equilibrium of (Qw1, Pw1), where the initial demand curve Dw1 and supply curve Sw1 intersect. When the renewable fuels mandate increases corn prices, the demand for wheat increases to Dw2. The subsequent increases in corn prices continue to shift out the demand for wheat until general equilibrium is reached at (QwF, PwF), where DwF intersects Sw1.