--%>

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 The amount of wheat paid is equivalent to the amount which could have been harvested on the land withdrawn from production.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 : Occurrence of economic profits in a

    Entry within a competitive industry will continue till: (w) accounting losses are driven to zero. (x) economic profits equal accounting losses. (y) bookkeeping profit approaches zero. (z) economic profits are driven to zero. Can an

  • Q : Minimum wage law for poor workers A

    A minimum wage law does NOT make pressures which tend to: (1) benefit high wage workers. (2) cause unemployment among unskilled workers. (3) uniformly help poor workers. (4) increase teenage unemployment. (5) foster discrimination.

    Q : Monopsony Power and Immobility of Labor

    Immobility of the labor is significant economically as: (1) Most of the people like to move, however cannot. (2) People in high salary occupations won't be completely compensated for the costs and difficulties related with their occupations. (3) It we

  • Q : Help In the quintile distribution of

    In the quintile distribution of income, the term "quintile" represents

  • Q : Asymmetic Infomation The problem of

    The problem of asymmetric information is that: A. neither health care buyers nor providers are well-informed. B. health care providers are well-informed, but buyers are not. C. the outcomes of many complex medical procedures cannot be predicted. D. insurance companies are well-informed but poli

  • Q : Market power as a price maker The only

    The only firm in this figure which has market power as a price maker is: (w) Firm A. (x) Firm B. (y) Firm C. (z) Firm D.

    Q : Tax onto the mathematically impaired By

    By the opinion of public finance economists and financial analysts that the label “a tax onto the mathematically impaired” is most likely most applicable to: (1) land taxes. (2) income taxes. (3) inheritance taxes. (4) purchases of lottery

  • Q : History-AFL-CIO The amalgamation of

    The amalgamation of American Federation of Labor, representing the craft unions and the Congress of Industrial Unions, representing the industrial unions, happened in: (i) 1955. (ii) 1960. (iii) 1970. (iv) 1965. (v) 1975. Find out

  • Q : Oligopoly and the law An illegal

    An illegal practice from an oligopolistic firm would be: (w) price leadership. (x) direct price collusion with rivals. (y) non-price competition. (z) mutual interdependence in price and output decisions. I need a g

  • Q : Maximize profit by monopolistic

    Monopolistic competitors maximize profit through: (w) adjusting output at a given price. (x) adjusting price for a given output. (y) adjusting output and price. (z) cheating. Can someone explain/help me with best s