Consider the following situation: some agricultural innovations, such as biotechnology, introduce quality differences into markets. Suppose that consumers have different attitudes toward food produced using this technology: while some consumers are indifferent between genetically modified (GM) food and conventional (non-GM) food, other consumers perceive GM food to be of lower quality and receive disutility from the consumption of GM food.

a) Assuming constant marginal costs of production for suppliers of non-GM food, graphically illustrate the welfare effect of a non-drastic GM innovation when a pooling equilibrium exists. Is society better off or worse off in this situation? Explain why (4 marks)

b) Show how the welfare effect differs for a drastic What can we conclude about the overall effect on society in this situation? Explain why (4 marks)

c) Suppose the non-GM sector introduced an identity preservation system to segregate their products from the GM equivalent giving a separating equilibrium. How would the outcome differ from the situation in parts (a) and (b)? Illustrate your answer graphically (7 marks)