Let the demand and supply for two linked products, say corn and soy, be the following: $Q _ { c } d = 12$ $- 2 p _ { c } + p _ { s } ; Q _ { c } { } ^ { s } = 4 + p _ { c } ; Q _ { s } ^ { d } = 6 - 4 p _ { s } + p _ { c } ; Q _ { s } { } ^ { 2 } = 4 + p _ { s }$. The superscript refers to "demand" (d) or "supply" (s) and the subscript refers to corn (c) or soy (s). Now, suppose that the demand for corn shifts to $Q _ { c } { } ^ { d } = 18 - 2 p _ { c } + p _ { s }$. If we conduct a partial equilibrium analysis of the corn market, taking the price of soy as given, rather than a general equilibrium analysis, allowing the price of soy to change, we:
A) underestimate the new price of corn.
B) overestimate the new price of corn.
C) correctly estimate the new price of corn.
D) Overestimate the new price of soy.

Question

Quizplus · Accepted Answer

By conducting a partial equilibrium analysis and taking the price of soy as given, we ignore the interdependence between the corn and soy markets. The shift in demand for corn would likely affect the price of soy as well, which in turn could affect the demand and supply conditions for corn. Ignoring these effects could lead to an underestimation of the new equilibrium price of corn, as the analysis does not account for potential increases in soy prices that could further affect corn prices.

Let the Demand and Supply for Two Linked Products, Say Qcd=12Q _ { c } d = 12Qc​d=12

Let the Demand and Supply for Two Linked Products, Say $Q _ { c } d = 12$