Posted: August 2nd, 2015

For the last 70 years the U.S. government has used price supports to provide income assistance to American farmers.

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. Vertical Axis values are 5,4,3,2,1,0 Horizontal axis values are 0,800,1000,1200 The supply curve starts at points are: 1/800, 3/1000, and 5/1200 The demand curve points are: 5/800, 3/1000, and 1/1200 a. If the government sets a price floor of $5 per bushel, how many bushels of corn are produced? How many are purchased by consumers? By the government? 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. How many bushels of corn are purchased by consumers and at what price? By the government? How much does the program cost the government? How much revenue do corn farmers receive? c. Which of these programs (in parts a and b) costs corn consumers more? Which program costs the government more? Explain. d. What are the inefficiencies that arise in each of these cases (parts a and b)?