--%>

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 The amount of wheat paid is equivalent to the amount which could have been harvested on the land withdrawn from production.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 : Pre-tax and pre transfer income

    From 1950, the pre-tax and pre transfer income distribution comprises: (w) become more equitably distributed. (x) remained about constant. (y) become less equitably distributed. (z) moderated because the rich and the poor both lost income to the middl

  • Q : Define straight line of supply curve

    When a supply curve is a straight line start from the origin, in that case supply is: (i) relatively elastic for all prices and quantities. (ii) relatively inelastic for all prices and quantities. (iii) unitarily elastic for all prices and quantities.

  • Q : Define feature of perfectly inelastic

    A perfectly inelastic demand curve: (w) is an imaginary mathematical construct, and does not exist within reality. (x) corresponds to a perfectly horizontal line. (y) represents a good which absorbs only a small portion of consumers’ budgets. (z

  • Q : Multinational corporations Give the

    Give the answer of following question. Multinational corporations: A) mainly are headquartered in Switzerland. B) are so named because of their heavy export volume. C) are illegal under the U.S. antitrust laws. D) are so named because of their sizable foreign producti

  • Q : Equal Income Distribution The income

    The income distribution tends to become more equal most quickly as countries become more: (1) socialistic. (2) capitalistic. (3) economically developed. (4) centrally planned. (5) agricultural. Please choose the ri

  • Q : Internal financing in Corporate Finance

    Can someone help me in finding out the precise answer from the given options. The corporations might get internal financing by: (i) Borrowing from the stockholders. (ii) Reinvesting the corporate income rather than paying it out as the dividends to stockholders. (iii)

  • Q : Causes of decrease in demand Illustrate

    Illustrate any three causes of decrease in demand? Answer: 1) Reduce in income of consumer. 2) Fall in the price of alternate good.3) Increase in the price of complementary goods.

  • Q : Excess demand for commodity When do we

    When do we state that there is an excess demand for a commodity in the market?

  • Q : Marginal Revenue and Costs in purely

    Hey friends I need your suggestion for this query about the profit and losses as illustrated graph when this firm produces q2 output, in that case its: (w) MR > MC. (x) MR < MC. (y) MR = MC. (z) P > MC.Please give me right answer for the same.

  • Q : Least consistency for law of demand The

    The demand curve for socket sets from the list below which is least consistent along with the law of demand is: (w) demand curve D1D1. (x) demand curve D2D2.  (y) demand curve D3D3