--%>

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 The amount of wheat paid is equivalent to the amount which could have been harvested on the land withdrawn from production.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 : Influences of Ceteris Paribus The Latin

    The Latin phrase applies to the idea which all other effects on some dependent variable are to be supposed constant if examining the effect of changing a single independent variable is as: (1) Fiat justitia, ruat coelum. (2) Platea unum. (3) Unum paribus. (4) Ceteris

  • Q : Corollary of the law of equal marginal

    The corollary of the law of equal marginal benefit is the principle of: (1) Equal marginal utilities per dollar. (2) Diminishing marginal utility. (3) Income injection. (4) Substitution in demand. (5) Diminishing returns. Can someo

  • Q : Thought of economists for law of equal

    Explain different thought of economists for law of equivalent marginal advantage.

  • Q : Free Trade Agreement Tell me the answer

    Tell me the answer of this question. Critics of the North American Free Trade Agreement (NAFTA) falsely feared that it would: A) increase the flow of illegal Mexican immigrants to the United States. B) cause the European Union and Japan to raise trade barriers against

  • Q : Problem on Buyers market I have a

    I have a problem in economics on Buyers market. Please help me in the following question. The buyer’s market is a market in which: (1) Queuing to secure goods is very common. (2) The present market price is beneath equilibrium. (3) Quantity dema

  • Q : Pricing for profit-car parking The

    The owner of a city centre car park desires to know the best price to charge for parking throughout office hours on weekdays. On a usual weekday, the car park is at present only half full.

  • Q : Problem regarding Bilateral Monopoly

    The bilateral monopoly model is most likely most applicable in analyzing a case where a: (1) Major employer collectively bargains with the influential union. (2) Firm consists of monopoly power in output market and monopsony power in the labor market. (3) Labor market

  • Q : Present value of future payments When

    When interest rates rise, in that case the present value of future payments will: (w) fall. (x) rise. (y) remain the same. (z) depend onto the transactions demand for money. How can I solve my Economics

  • Q : Principal-Agent Problems-Institutions

    According to the John Kenneth Galbraith, the modern corporate planning: (i) Aims at decreasing risks to the managers of main firms. (ii) Stresses the maximization of gains. (iii) Is much concerned with the social goals. (iv) Maximizes the social welfare.

  • Q : Average cost-aversge variable

    Relation between Average cost, aversge variable cost and Marginal cost:

    Discover Q & A

    Leading Solution Library
    Avail More Than 1427519 Solved problems, classrooms assignments, textbook's solutions, for quick Downloads
    No hassle, Instant Access
    Start Discovering

    18,76,764

    1928762
    Asked

    3,689

    Active Tutors

    1427519

    Questions
    Answered

    Start Excelling in your courses, Ask an Expert and get answers for your homework and assignments!!

    Submit Assignment

    ©TutorsGlobe All rights reserved 2022-2023.