Author Question: Refer to Table 4-9. An agricultural price floor is a price that the government guarantees farmers ... (Read 152 times)

natalie2426 · **on:** Jun 29, 2018

Refer to Table 4-9. An agricultural price floor is a price that the government guarantees farmers will receive for a particular crop. Suppose the federal government sets a price floor for corn at 12 per bushel.

a. What is the amount of shortage or surplus in the corn market as result of the price floor?
b. If the government agrees to purchase any surplus output at 12, how much will it cost the government?
c. If the government buys all of the farmers' output at the floor price, how many bushels of corn will it have to purchase and how much will it cost the government?
d. Suppose the government buys up all of the farmers' output at the floor price and then sells the output to consumers at whatever price it can get. Under this scheme, what is the price at which the government will be able to sell off all of the output it had purchased from farmers? What is the revenue received from the government's sale?
e. In this problem we have considered two government schemes: (1 ) a price floor is established and the government purchases any excess output and (2 ) the government buys all the farmers' output at the floor price and resells at whatever price it can get. Which scheme will taxpayers prefer?
f. Consider again the two schemes. Which scheme will the farmers prefer?
g. Consider again the two schemes. Which scheme will corn buyers prefer?

Question 2

How do taxes and needs-tested spending programs work as automatic fiscal policy to dampen the business cycle?

What will be an ideal response?

soda0602 · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

a. 10,000 surplus.
b. 12 10,000 = 120,000.
c. 28,000 bushels 12 = 336,000.
d. 6 per bushel and government receives 6 28,000 = 168,000.
e. Taxpayers prefer scheme (1).
f. In terms of revenue, farmers are indifferent between the two schemes.
g. Corn buyers prefer scheme (2).

Answer to Question 2

Taxes, such as income taxes, and needs-tested spending programs both work as automatic fiscal policy because they decrease the effect a change in income has on aggregate expenditure. For instance, when income decreases, consumption expenditure and aggregate expenditure decrease. But with the fall in income, income taxes decrease and needs-tested spending increase so that disposable income does not fall as much as does income. The smaller fall in disposable income means that the fall in consumption expenditure is smaller, so that the fall in aggregate expenditure is likewise smaller.