Question

Suppose that new water quality regulations have banned certain fungicides that are typically used to control wheat rust. This will increase the variable costs of producing wheat in the US by $2 a bushel,

Will this shift Demand? If so, which way and by how much?

Will this shift Supply? If so, which way and by how much?

What is the new equilibrium price and quantity? Show your calculations.

What effect will this have on producers?

What effect will this have on consumers?

Answer 1

This will not shift the demand curve but will shift the supply curve leftward. Thus, equilibrium quantity will fall and price level will rise. The shift will be in supply curve because the cost of input to production   increases which is a supply side factor. This will affect both the consumer as well as the producer because both the consumer and producer surplus will decrease.

*For calculation to new equilibrium prices demand and supply function are not given.