--%>

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 The amount of wheat paid is equivalent to the amount which could have been harvested on the land withdrawn from production.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 : Greater economics loss than fixed costs

    Within the short run, there a monopolistically competitive firm will NOT operate at: (w) an economic loss that is less than fixed costs. (x) an economic loss that is greater than fixed costs. (y) making a normal profit. (z) making economic profits.

  • Q : Relatively price elastic demand for

    If a change in the supply of a good results within a percentage change into quantity demanded which exceeds within absolute value the percentage change within price, in that case demand is relatively: (i) price elastic. (ii) inferior. (iii) normal. (i

  • Q : Quantity demanded to exceed quantity

    I have a problem in economics on Quantity demanded to exceed quantity supplied. Please help me in the following question. A shortage takes place whenever the current market price causes: (1) Quantity demanded to surpass quantity supplied. (2) Quantity

  • Q : Types of good An increase in the income

    An increase in the income of consumer X leads to a fall/down in the demand for that good by the consumer. What is good X termed? Answer: Normal good

  • Q : Twenty-one amendment of public polices

    Drive-by shootings by that several groups of beer or liquor distributors or producer attempted to liquidate rival groups largely finished while the: (w) U.S. Constitution was ratified and Whiskey Rebellion which began into 1794 finally finished. (x) 21st amendment to

  • Q : Spending pattern in Substitution Effects

    I have a problem in economics on spending pattern in Substitution Effects. Please help me in the following question. Even when your real income were held steady by adjusting for price modifications, your spending pattern would react to modifications in relative prices

  • Q : Managerial economics and good business

    please find the attached file (project) and qoute for it. minimus 7 pages required.

  • Q : Laws and Regulations-caveat emptor I

    I have a problem in economics on Laws and Regulations-caveat emptor. Please help me in the following question. The Latin phrase which means ‘let the buyer beware is: (1) Caveat emptor. (2) Laissez-faire. (3) Fiat justitia and ruat coelum. (4) Epluribus unum. (5)

  • Q : Profit Maximization in Labor Markets

    Can someone help me in finding out the right answer from the given options. All the profit maximizing firms use labor up to the point where: (1) VMP = MFC. (2) VMP = w. (3) VMP = MRP. (4) MRP = MFC. (5) MR   MC is maximized.

  • Q : Problem on Resource Costs Can someone

    Can someone help me in finding out the precise answer from the given options. A raise in the cost of resource inputs would lead to the: (1) Shift of the supply curve to right. (2) Shift of the supply curve to left. (3) Movement upward all along the su