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10 Jul 2019

Farmers can use their land to grow corn or cotton. Because of the increased demand for moisture- wicking sportswear, the demand for cotton has decreased. What are the general equilibrium effects in the market for corn and the market for cotton?

The price of cotton will rise from the decrease in demand, causing farmers to plant more cotton and less corn.

The decrease in the supply of corn will push up corn prices.
The price of cotton will fall from the decrease in demand, causing farmers to plant less cotton. The decrease in the supply of cotton will raise cotton prices and cause the demand for corn to rise.
The price of cotton will fall from the decrease in demand, causing farmers to plant less corn. The decrease in the supply of corn will raise corn prices and cause the demand for cotton to fall.
The price of cotton will fall from the decrease in demand, causing farmers to plant less cotton and more corn. The increase in the supply of corn will push down corn prices.

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Beverley Smith
Beverley SmithLv2
10 Jul 2019

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Related questions

Suppose that the demand curve for corn is given by the formula Q =100 - 2P.

a) Using the point elasticity formula, what is the price elasticity of demand for corn when the equilibrium quantity demanded in the market is 60 units? Round to the nearest two digits.

b) Suppose that irrigation technology for corn improves so that more corn can be produced from each plot of land using the same amount of labour, and labour is the only variable input in the production of corn. What do you expect will happen to the total revenue earned from sales by corn farmers in the new equilibrium compared to the old one, i.e., is it likely to increase, decrease or stay the same? Why? (Hint: Start by considering how supply and/or demand are affected.)

For the last 70 years, the U.S. government has used price supports to provide income assistance to American farmers. At times the government has used price floors, which it maintains by buying up the surplus farm products. At other times, it has used target prices, a policy by which the government gives the farmer an amount equal to the difference between the market price and the target price for each unit sold. Consider the market for corn depicted in the accompanying figure.


Price of corn quantity of corn (bushels)
Per bushel           demand      supply
$5                           800         1200
4
3                            1000        1000
2
1                            1200         800
0

a. If the government sets a price floor of $5 per bushel, what does that mean and how will it affect supply and demand (illustrate on the supply and demand curve below)? How many bushels of corn are produced by the farmer? How many bushels of corn are purchased by consumers and at what price? How many bushels of corn are purchased by the government and at what price? How much does the program cost the government? How much revenue do corn farmers receive?





b. Suppose the government sets a target price of $5 per bushel for any quantity supplied up to 1,000 bushels What does that mean and how will it affect supply and demand (illustrate on the supply and demand curve below)? How many bushels of corn are purchased by consumers and at what price? How many bushels of corn are purchased by the government, if any? How much does the government pay the farmer and at what price? How much revenue do corn farmers receive?



c. Which of these programs (in parts a and b) costs corn consumers more? Explain.
Which program costs the government more? Explain. What are the inefficiencies that arise in each of these cases (parts a and)?

5. For the last 70 years the U.S. government has used price supports to provide income assistance to American farmers. At times the government has used price floors, which it maintains by buying up the surplus farm products. At other times, it has used target prices, a policy by which the government gives the farmer an amount equal to the difference between the market price and the target price for each unit sold. Consider the market for corn depicted in the accompanying figure.


Price of corn quantity of corn (bushels) Per bushel demand supply
$5 800 1200
4
3 1000 1000
2
1 1200 800
0

a. If the government sets a price floor of $5 per bushel, what does that mean and how will it affect supply and demand (illustrate on the supply and demand curve below)? How many bushels of corn are produced by the farmer? How many bushels of corn are purchased by consumers and at what price? How many bushels of corn are purchased by the government and at what price? How much does the program cost the government? How much revenue do corn farmers receive? (10points)

b. Suppose the government sets a target price of $5 per bushel for any quantity supplied up to 1,000 bushels What does that mean and how will it affect supply and demand (illustrate on the supply and demand curve below)? How many bushels of corn are purchased by consumers and at what price? How many bushels of corn are purchased by the government, if any? How much does the government pay the farmer and at what price? How much revenue do corn farmers receive? (10 points)

c. Which of these programs (in parts a and b) costs corn consumers more? Explain.
Which program costs the government more? Explain. What are the inefficiencies that arise in each of these cases (parts a and b)? (20 points)


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