This is the latest in a series of posts by Professor Brian Cutsinger on issues in price theory. Subscribe to Cutsinger’s EconLog RSS feed to see all Cutsinger issues and solutions. Please share your proposed solutions in the comments. Professor Cutsinger will be participating in the comments over the next few weeks and will post his proposed solution shortly thereafter. May the graph be favorable to you and may the price theory endure!
Question: Consider the market for fresh vegetables and instant noodles. Suppose that fresh vegetables are a normal good and instant noodles are an inferior good. Suppose that Congress bans fertilizers and pest control chemicals commonly used in vegetable cultivation. Without this input, vegetable yields will decline and rot due to pest damage will increase.
(a) Using a supply and demand diagram, explain how this policy would affect the equilibrium price and quantity of fresh vegetables.
(b) Explain how an increase in the price of vegetables affects the real purchasing power of households.
(c) Considering that vegetables are a normal good and instant noodles are an inferior good, explain how the policy affects the demand for each good.
(d) Use a demand and supply diagram to show the change in the equilibrium price and quantity of instant noodles.
(e) What are the unintended consequences of this regulation on people’s eating habits?
