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Chapter 9: Problem 4

In \(1983,\) the Reagan administration introduced a new agricultural program called the Payment-in-Kind Program. To see how the program worked, let's consider the wheat market: a. Suppose the demand function is \(Q^{D}=28-2 P\) and the supply function is \(Q^{S}=4+4 P\), where \(P\) is the price of wheat in dollars per bushel, and \(Q\) is the quantity in billions of bushels. Find the freemarket equilibrium price and quantity. b. Now suppose the government wants to lower the supply of wheat by 25 percent from the freemarket equilibrium by paying farmers to withdraw land from production. However, the payment is made in wheat rather than in dollarshence the name of the program. The wheat comes from vast government reserves accumulated from previous price support programs. The amount of wheat paid is equal to the amount that could have been harvested on the land withdrawn from production. Farmers are free to sell this wheat on the market. How much is now produced by farmers? How much is indirectly supplied to the market by the government? What is the new market price? How much do farmers gain? Do consumers gain or lose? c. Had the government not given the wheat back to the farmers, it would have stored or destroyed it. Do taxpayers gain from the program? What potential problems does the program create?

Short Answer

Expert verified
The free-market equilibrium price and quantity will be calculated. Then the supply reduction by the government will change the equilibrium price and quantity. Producers gain in higher prices for their product and the consumers lose as they have to pay higher prices for the same product. Implications for taxpayers and potential problems for the economy must be discussed based on various perspectives.

Step by step solution

01

Calculate the free-market equilibrium

Equilibrium is achieved when the quantity demanded equals the quantity supplied. Hence, set \(Q^{D} = Q^{S}\) or \(28 - 2P = 4 + 4P\). Solve this equation to get the value of \(P\). Then plug this value into either the demand or supply function to get the equilibrium quantity.
02

Calculate the reduced supply

The government is reducing supply by 25 percent. Therefore the new supply will be 75% of the free-market equilibrium quantity. Calculate this amount and denote it as the amount produced by the farmers. The indirectly supplied amount by the government will be equal to 25% of the free-market equilibrium quantity.
03

Find new equilibrium price

The new supply will be equal to the sum of the amount produced by the farmers and the government. The new equilibrium price can be obtained by setting this new supply equal to the original demand function and solving for price.
04

Calculate farmers' gain and consumer loss

Farmers' gain will be their sales at new price minus their sales at the original price. Consumer loss will be the difference in expenditure for the consumers at the new price and the original price.
05

Discuss taxpayers' gain and potential problems

The gain or loss for taxpayers from the program is subjective and can be argued for or against. It must be argued from the perspective that if the wheat has not been given to farmers, it would have been stored or destroyed. Also, potential issues like market disruption, unrealistic price levels, etc. can be discussed here.

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Most popular questions from this chapter

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