--%>

Question on lowering the supply

The Reagan Administration introduced new agricultural program named as the Payment-in-Kind Program, in the year of 1983. In order to distinguish how the program worked, let's assume the wheat market. Now assume the government desire to lower the supply of wheat by 25 percent from the free-market equilibrium by paying farmers to withdraw land from production. Though, the payment is made in wheat instead of in dollars--hence the name of the program. The wheat comes from the government's vast reserves that resulted from previous price-support programs. The amount of wheat paid is equivalent to the amount which could have been harvested on the land withdrawn from production. Farmers are free to sell this wheat on the market. How much is produced by farmers now? How much is supplied indirectly to the market by the government? What is the new market price? How much do the farmers gain? Do consumers gain or lose?
Since the free market supply by farmers is 20 billion bushels, the 25 percent reduction needed by the new Payment-In-Kind (PIK) Program would imply that the farmers now generate 15 billion bushels. To encourage farmers to withdraw their land from cultivation, the government have to give them 5 billion bushels, which they sell on the market.
Since the total supply to the market is still 20 billion bushels, the market price does not change; this remains at $4 per bushel. The farmers gain $20 billion, equal to ($4)(5 billion bushels), from the PIK Program, since they incur no costs in supplying the wheat (which they received from the government) to the market. The PIK program does not influence consumers in the wheat market, since they purchase the similar amount at the same price as they did in the free market case.

   Related Questions in Microeconomics

  • Q : Oligopoly and economic welfare in long

    In an oligopoly, as opposite to monopolistic or pure competition, industry output within the long run is probable to be: (1) lower along with reduced prices. (2) about similar but with higher prices. (3) lower and with higher prices.

  • Q : Okun's Law Coefficient Is so Large Why

    Why the Okun's Law Coefficient Is so Large? Okun's Law posits not a 1-to-1 relation but a 2.5-to-1 relationship between real GDP growth and the unemployment rate. That is, a one percentage-point fall in the unemployment rate is associated not with a 1 but a 2.5 percent boost in the level of produ

  • Q : Contestable Markets When consumers

    When consumers ultimately cannot distinguish one roasted chicken dinner from other, when roasted chicken dinners are produced within a constant cost industry, and when no barriers to entry or exit exist, in that case the long-

  • Q : Risk and Uncertainty of Probability

    If estimating the nature of a probability function for an event entails considerable guesswork since experience along with the event is more sporadic or rare which any estimates are extremely speculative, in that case we confront a concept Fra

  • Q : Competitive Profit Maximization Can

    Can someone please help me in finding out the accurate answer from the following question. The profit-maximizing competitive firm hiring from the competitive labor market will be in balance or equilibrium where: (i) w = MRC. (ii) MPP = MRC. (iii) VMP = MPP. (iv) VMP =

  • Q : Risk and Uncertainty In word of Frank

    In word of Frank Knight, risk: (w) exists when the probability of any specified event can be predicted. (x) appeals to the gambler personalities of innovators who next in social progress. (y) is irrelevant to good calculates of the economic costs of p

  • Q : Utility function notes on separable

    notes on separable utility function in microeconomics

  • Q : Determine highest incomes at specific

    Salespeople as illustrated in graph who earn percentage commissions upon the total revenue from DVD games would create their highest incomes at specific price of: (w) $50. (x) $25. (y) $10. (z) zero.

    Q : Primary functions of money Elucidate

    Elucidate the Primary functions of money. Answer: Primary functions: 1) Medium of Exc

  • Q : Problem on production costs I have a

    I have a problem in economics on Problem on production costs. Please help me in the following question. From the viewpoint of sellers, the market demand for the good mainly based least on: (i) Consumer preferences and tastes. (ii) Income and its distr