Chapter 39-Agriculture: Problems, Policies, and Unintended Effects

Chapter 39Agriculture: Problems, Policies, and Unintended Effects
MULTIPLE CHOICE
1. During the twentieth century, the U.S. farm sector experienced

a. large increases in its ability to produce output.
b. relatively little improvement in its ability to produce output.
c. a marked decrease in its ability to produce output.
d. relatively stable demand for its output.
e. increasing relative prices for its output.
ANS: A PTS: 1 DIF: Difficulty: Easy
NAT: BUSPROG: Analytic LOC: DISC: Productivity and growth
KEY: Bloom's: Comprehension
2. In 2000, farmers in the United States represented approximately what percentage of the population?
a. 8 percent
b. 25 percent
c. 1 percent
d. 5 percent
ANS: C PTS: 1 DIF: Difficulty: Easy
NAT: BUSPROG: Analytic LOC: DISC: Markets, market failure, and externalities
KEY: Bloom's: Knowledge
3. Increased productivity in the agricultural sector during much of the twentieth century shifted the
a. demand curve for farm products rightward.
b. supply curve of farm products leftward.
c. demand curve for farm products leftward.
d. supply curve of farm products rightward.
ANS: D PTS: 1 DIF: Difficulty: Moderate
KEY: Bloom's: Application
4. Increased productivity in the agricultural sector is not always a benefit to farmers because it is
accompanied by
a. lower prices and if demand is inelastic, lower prices mean lower revenues.
b. higher prices and if demand is elastic, higher prices mean lower revenues.
c. lower prices and if demand is elastic, lower prices mean lower revenues.
d. higher prices and if demand is inelastic, higher prices mean lower revenues.
ANS: A PTS: 1 DIF: Difficulty: Moderate
5. If the demand curve for agricultural products is inelastic and farmers as a group become more
productive, then prices of agricultural goods will __________ and total revenue earned by farmers will
__________.
a. decrease; increase
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b. decrease; decrease
c. increase; increase
d. increase; decrease
e. We cannot answer this question without knowing how inelastic the demand curve is.
ANS: B PTS: 1 DIF: Difficulty: Moderate
NAT: BUSPROG: Analytic LOC: DISC: Elasticity
6. If the demand curve for agricultural products is elastic and farmers as a group become more
productive, then prices of agricultural goods will __________ and total revenue earned by farmers will
__________.
a. decrease; increase
b. decrease; decrease
c. increase; increase
d. increase; decrease
e. We cannot answer this question without knowing how elastic the demand curve is.
7. If the demand for a particular farm product is inelastic between price P 1 and P2 (where P2 > P1),
farmers as a group would want to sell their product at the
a. higher price, but an individual farmer would rather sell his product at the lower price.
b. higher price, and an individual farmer would rather sell his product at the higher price, too.
c. lower price, but an individual farmer would rather sell his product at the higher price.
d. lower price, and an individual farmer would rather sell his product at the lower price, too.
8. If the demand curve for agricultural products is inelastic, then it would be in the best interest of
farmers as a group to
a. increase output and thereby receive greater revenues.
b. cause the price of their product to decrease.
c. find some way to decrease the quantities of output that are placed on the market for sale.
d. petition the government to find a way to decrease the demand for their product.
e. a and b
ANS: C PTS: 1 DIF: Difficulty: Moderate
9. Suppose farmers get together and decide to be less productive. They want to do this so that they can
shift the supply curve of farm products leftward and raise the price. They must be assuming that the
demand curve between the current price and the higher price is
a. inelastic.
b. elastic.
c. unit elastic.
d. There is not enough information to answer this question.
10. Which of the following statements is true?

a. Bad weather isn't always that bad for farmers' incomes.
b. An individual farmer would probably increase his revenues if he experienced good
weather and other farmers experienced bad weather.
c. Price elasticity of demand is a relevant factor to a farmer's income.
d. a and b
e. a, b, and c
ANS: E PTS: 1 DIF: Difficulty: Moderate
11. Suppose farmers get together and decide to be less productive. They want to do this so that they can
shift the supply curve of farm products leftward and raise the price. What are the thoughts of a profit-
maximizing farmer most likely to be once this agreement has been made?
a. If I break the agreement while everyone else holds to it, I can make myself better off.
b. I am happy that we decided to be unproductive; I can't be unproductive by myself.
c. I will definitely hold to the agreement.
d. Everyone will break the agreement but me.
12. Studies show that as real income has been rising in the United States, the per-capita demand for food
has been increasing by
a. much less, which means the demand for food is income inelastic.
b. much more, which means the demand for food is income elastic.
c. much more, which means the demand for food is income inelastic.
d. as much, which means the demand for food is unit elastic.
e. none of the above
13. Which of the following best describes the agricultural sector for much of the 20th century and today?
a. high productivity, price elasticity of demand less than 1, income elasticity of demand
greater than 1
b. low productivity, price elasticity of demand greater than 1, income elasticity of demand
less than 1
c. high productivity, price elasticity of demand less than 1, income elasticity of demand less
than 1
d. low productivity, price elasticity of demand less than 1, income elasticity of demand
greater than 1
14. Studies show that, in the United States,

a. price elasticity of demand for agricultural products has hovered around 3.2 for many
years.
b. as real income has been increasing, the per-capita demand for food has been decreasing.
c. as real income has been increasing, the per-capita demand for food has been increasing by
much more.
d. none of the above
15. If we assume that the income elasticity of demand for food has been around 0.2 and that agricultural
producers have become increasingly more productive, we can conclude that
a. prices of food have increased.
b. supply increases have been less than demand decreases.
c. as consumers' real incomes have been increasing over the years, they have been spending
absolutely less on food.
d. prices of food have been stable.
16. During much of the 20th century, agricultural product prices

a. rose relative to other prices.
b. fell relative to other prices.
c. neither rose nor fell relative to other prices.
d. rose as agricultural productivity increased.
17. Suppose the price elasticity of demand of for soy beans is 0.85. When the price of soybeans rises by
20 percent, the quantity demanded of soybeans falls by approximately _____________ percent.
a. 0.024
b. 26.67
c. 23.53
d. 17.00
KEY: Bloom's: Application NOT: New
18. With a price elasticity of demand of 0.45, when the price of soybeans falls by 10 percent, the quantity
demanded of soybeans rises by approximately _____________ percent.
a. 4.50
b. 45.0
c. 0.45
d. 0.56
19. Suppose iceberg lettuce has an income elasticity of demand of 0.35. A 10 percent increase in income
causes the quantity demanded of iceberg lettuce to _______________ by ______________ percent.
a. rise; 3.5
b. rise; 28.57
c. fall; 28.57
d. fall; 3.5
20. Evidence seems to indicate that the demand for many agricultural products
a. has increased much more than supply over the years.
b. is relatively elastic.
c. is relatively inelastic.
d. is relatively income elastic.
e. b and d
21. Which combination of factors would lead to large price and total revenue changes?
a. inelastic demand for a product and large swings in supply
b. elastic demand for a product and small swings in supply
c. inelastic demand for a product and constant supply
d. a and c
22. Which of the following combinations of factors comes closest to describing the situation in
agriculture?
a. elastic demand for agricultural products and large swings in supply
b. elastic demand for agricultural products and small swings in supply
c. inelastic demand for agricultural products and constant supply
d. inelastic demand for agricultural products and large swings in supply
23. Why is bad weather sometimes good news for farmers?
a. Bad weather shifts the supply curve of agricultural products leftward, driving up price and
total revenue (assuming demand is inelastic).
b. Bad weather shifts the supply curve of agricultural products leftward, driving down price,
and raising total revenue (assuming demand is elastic).
c. Bad weather increases the demand for and price of agricultural products.
d. Bad weather increases both the demand for and supply of agricultural products.
ANS: A PTS: 1 DIF: Difficulty: Challenging
24. If the demand for a particular agricultural product is highly elastic and bad weather causes the supply
to decrease, then we would expect the price of agricultural products to
a. decrease and farmers' revenues to decrease.
b. increase and the demand to decrease.
c. increase while farmers' revenues decrease significantly.
d. increase by a large percentage while farmers' revenues decrease only slightly.
25. In agriculture during much of the 20th century, supply grew more than demand. Which two farm
problems are these?
a. the high-productivity problem and the income elasticity problem
b. the low-productivity problem and the income inelasticity problem
c. the high-productivity problem and the income inelasticity problem
d. the low-productivity problem and the income elasticity problem
26. If the government establishes a price floor for agricultural products, then
a. consumers will pay a lower price for the products.
b. consumers will increase the quantity that they are willing to consume.
c. farmers will want to decrease their production.
d. the government will need to purchase the resulting surplus.
e. all of the above
NAT: BUSPROG: Analytic LOC: DISC: The role of government
27. Suppose the government decides that milk producers are not earning a high enough price for their milk
to maintain an adequate standard of living and that the solution to the problem is to guarantee the milk
producers a minimum price. We would expect that
a. consumers will have to pay a higher price per gallon of milk and will not be able to
consume as much as they did before.
b. the government will have to purchase the surplus milk on the market and then find a
means of storing this milk.
c. the dairy farmers will enjoy a higher standard of living at the expense of taxpayers and
consumers.
d. all of the above
28. Under an acreage allotment program,

a. the government sets a limit on the quantity of a product that a farmer is allowed to bring to
market, which is intended to cause farmers to cut back on the number of acres they
cultivate.
b. farmers are paid to take part of their land out of cultivation.
c. farmers are given limits as to the number of acres that can be farmed.
d. farmers are paid the difference between the market price of their product and a
governmentally determined price that would maintain an established price parity.
e. the government establishes a minimum price that farmers will be paid for their product,
which causes the farmers to cut back on the number of acres planted.
29. Which of the following government agricultural policies is not aimed at restricting supply?
a. price supports
b. acreage allotments
c. market quotas
d. paying farmers not to produce
30. Which of the following is not an effect of an agricultural price support?

a. a surplus
b. fewer exchanges
c. higher prices paid by consumers
d. government purchase and storage of surplus
e. higher-quality products
31. Which of the following increases the quantity supplied of agricultural goods?
a. acreage allotments
b. assigning market quotas
c. agricultural price supports
d. a, b, and c

32. Under a marketing quota system,

market.
b. farmers are paid to take part of their land out of cultivation.
c. farmers are given limits as to the number of acres that can be used to produce a particular
product.
governmentally determined price that would maintain an established price parity.
which causes the farmers to cut back on the number of acres planted.
33. Suppose 100 bushels of X are produced at a target price of $7 per bushel, but consumers will only buy
100 bushels at $3 a bushel. What is the total deficiency payment to farmers?
a. $400
b. $600
c. $300
d. $100
34. If the government establishes a target price for particular agricultural products, then
market.
b. farmers are paid to take part of their land out of cultivation, the intent being to reduce
supply and raise price to the target level.
c. farmers are given limits as to the number of acres that can be used to produce a particular
product, the intent being to reduce supply and raise price to the target level.
government-determined price.
which causes the farmers to cut back on the number of acres planted in certain products,
which, in turn, causes the price to rise to the target level.
35. One unintended consequence of the various attempts to restrict farm acreage was that
a. output generally decreased, price increased, and farmers earned higher incomes.
b. individual farmers intensified their efforts to harvest crops from the land still under
cultivation.
c. farmers' incomes remained constant in real terms.
d. the land that was set aside became less productive.
36. In the acreage allotment program, a farmer's acreage allotment is sometimes based on a farmer's
a. history of production.
b. income.
c. location.
d. b and c
37. Under the target price program,

a. the government ends up buying the surplus product that results.
b. taxpayers pay the difference between the price consumers pay and the target price.
c. deficiency payments are made to both rich and poor farmers.
d. the surplus that results is sometimes dumped or otherwise wasted.
e. b and c
Exhibit 39-1
38. Refer to Exhibit 39-1. Given the target price PT, what is the quantity supplied?
a. Q1
b. Q2
c. Q3
d. Q3 - Q1
39. Refer to Exhibit 39-1. Given the target price of PT, the deficiency payment per unit is
a. PT - P2.
b. PT + P1.
c. PT - P2.
d. PT - P1.
40. Refer to Exhibit 39-1. Given the target price of PT, farmers will receive a total income equal to
a. 0PTBQ2.
b. 0P1CQ2.
c. 0PTAQ3.
d. 0P2EQ1.
41. Refer to Exhibit 39-1. Given the target price PT, the total deficiency payment made by the government
is the area of
a. 0P1CQ2.
b. 0PTBQ2.
c. PTBCP1.
d. PTBEP2.
42. Refer to Exhibit 39-1. At a support price of PT, private sector spending on this good equals
a. PT x Q3.
b. PT x Q2.
c. P1 x Q3.
d. P1 x Q2.
43. Refer to Exhibit 39-1. At the support price of PT, how many units of the good must the government
buy and store?
a. Q1
b. Q3
c. Q1 - Q3
d. Q2 - Q3
44. In general, agricultural price supports

a. raise food prices.
b. have no impact on food prices.
c. are designed to lower food prices.
d. c and d
45. Under the target price system,

a. supply is restricted.
b. consumers must pay the target price.
c. payments are made to the government when the price paid by consumers rises above the
target price.
d. farmers are paid a deficiency payment if the market price for their goods is below the
target price.
e. a and c
46. Supply-restricting policies are intended to shift the

a. supply curve to the left.
b. supply curve to the right.
c. demand curve to the left.
d. demand curve to the right.
e. b and d
NAT: BUSPROG: Analytic LOC: DISC: Supply and demand
47. Supply-restricting policies are intended to __________ prices and __________ farmers' revenues.
a. lower; increase
b. lower; reduce
c. raise; increase
d. raise; reduce

48. The effect of a drought on the price of an agricultural product will be greater the more __________ the
demand for the agricultural product.
a. price inelastic
b. price elastic
c. income elastic
d. a and c
e. b and c
49. A decrease in the supply of an agricultural product will increase the total revenue of farmers if the
demand for the agricultural product is
a. income elastic.
b. income inelastic.
c. price elastic.
d. price inelastic.
50. Agricultural price supports refer to

a. minimum prices set by the government on certain farm products.
b. maximum prices set by the government on certain farm products.
c. supply-restricting policies imposed by the government on certain farm products.
d. b and c
Exhibit 39-2

51. Refer to Exhibit 39-2. If P1 is a price support, the quantity of wheat purchased by the market would be
equal to
a. Q2.
b. Q0.
c. Q1.
d. Q2 - Q1.
e. Q1 - Q0.
52. Refer to Exhibit 39-2. If P1 is a price support, the quantity of wheat purchased by the government
would be equal to
a. Q0 - Q1.
b. Q2 - Q1.
c. Q2 - Q0.
d. Q2.
e. Q1.
53. Refer to Exhibit 39-2. If P1 is a price support, the cost of the price support program to the government
is
a. P1 x Q2.
b. P1 x (Q2 - Q0).
c. P1 x (Q0 - Q1).
d. P1 x (Q2 - Q1).

54. Refer to Exhibit 39-2. Given a target price of P1, what price does the consumer pay?
a. P1.
b. P0.
c. P2.
d. a price not shown on the diagram.
55. Refer to Exhibit 39-2. Given a target price of P1, what is the total deficiency payment made by the
government?
a. (P1 - P2) x Q2
b. (P1 - P0) x Q2
c. P1 x Q1
d. P0 x Q0
56. The acreage allotment program involves

a. no direct payments to farmers.
b. direct payments to farmers.
c. the government leasing land to farmers that is to be cultivated by the farmers.
d. the government leasing land from farmers that is to be cultivated by the government.
57. Increased productivity in the agricultural sector has __________ the output and __________ the prices
of agricultural goods.
a. increased; reduced
b. increased; increased
c. decreased; reduced
d. decreased; increased
e. had no impact on; had no impact on
58. A shift of the supply curve for farm products to the right in a price inelastic region of the demand
curve for farm products
a. reduces price and total revenue.
b. increases price and reduces total revenue.
c. reduces price and increases total revenue.
d. increases prices and total revenue.
59. Increased productivity in the agricultural sector in conjunction with an inelastic demand curve for
agricultural goods has caused a(n) __________ in output, a(n) __________ in price, and __________
revenues for farmers.
a. increase; decrease; higher
b. increase; decrease; lower
c. decrease; increase; higher
d. decrease; increase; lower
e. increase; increase; higher
ANS: B PTS: 1 DIF: Difficulty: Challenging
60. An increase in productivity in the agricultural sector when the demand curve is inelastic results in
__________ prices for consumers and __________ revenues for farmers
a. higher; lower
b. higher; higher
c. lower; lower
d. lower; higher
e. no change in; no change in
61. An increase in productivity in the agricultural sector in conjunction with an income inelastic demand
for farm products
a. causes prices to fall.
b. causes prices to rise.
c. causes prices to remain constant.
d. may cause prices to rise, fall, or remain the same, depending upon the relative shifts in the
supply and demand curves.
62. Suppose that both the demand for and supply of agricultural products increases. If the increase in the
supply of agricultural products is greater than the increase in demand, prices of agricultural products
a. increase.
b. decrease.
c. remain the same.
d. may increase, decrease, or remain the same.
63. The demand for farm goods is income inelastic if the percentage change in quantity demanded is
__________ the percentage change in __________.
a. greater than; income
b. equal to; income
c. less than; income
d. greater than; revenue
e. less than; revenue
64. If the demand for agricultural products is price inelastic and the supply is dependent upon weather
conditions, then
a. price changes are likely to be small, and farm revenues are likely to be highly volatile.
b. price changes are likely to be large, and farm revenues are likely to be highly volatile.
c. prices are likely to be constant, and farm revenues are likely to be constant.
d. prices are likely to be constant, and farm revenues are likely to be highly volatile.
e. price changes are likely to be small, and farm revenues are likely to be constant.
65. A government agricultural policy in which a mandated minimum price is set is the
a. marketing quota system.
b. acreage allotment program.
c. price support program.
d. target price system.
e. paying farmers not to produce system.
66. A government agricultural policy that restricts output by limiting the number of farm acres that can be
used to produce a particular crop is the
67. A government agricultural policy that sets a limit on the quantity of a product that a farmer is allowed
to bring to market is the
68. A government agricultural policy in which a guaranteed price is set and no surplus is created is the
69. When the government institutes a target price,

a. a surplus is created.
b. consumers must pay the target price.
c. the farmer receives a deficiency payment if the market price is below the target price.
d. the farmer receives a deficiency payment if the market price is above the target price.
e. all of the above
Exhibit 39-3
70. Refer to Exhibit 39-3. If P3 is a price support, the amount sold on private markets is
a. Q1.

b. Q2.
c. Q3.
d. Q2 - Q3.
e. Q1 - Q3.
71. Refer to Exhibit 39-3. If P3 is a target price, the quantity supplied is

a. Q1.
b. Q2.
c. Q3.
d. Q2 - Q3.
e. Q1 - Q3.
72. Refer to Exhibit 39-3. If P3 is a target price, the price at which output will be purchased is
a. P1.
b. P2.
c. P3.
d. P3 - P2.
e. P1 - P2.
73. Refer to Exhibit 39-3. If P3 is a target price, the deficiency payment per unit is
a. P1.
b. P2.
c. P3.
d. P3 - P1.
e. P3 - P2.
74. Refer to Exhibit 39-3. If P3 is a target price, the total deficiency payment that government makes to
farmers is
a. P2 x Q3.
b. P3 x Q3.
c. (P3 - P1) x Q1.
d. (P3 - P1) x Q2.
e. (P3 - P2) x Q3.
Exhibit 39-4
75. Refer to Exhibit 39-4. At the competitive equilibrium price and quantity, the total revenue of wheat
farmers will be
a. $1,400.
b. $1,800.
c. $2,400.
d. $2,800.
e. $5,000.
76. Refer to Exhibit 39-4. The government feels that the present level of farmers' total revenues is
insufficient to support a reasonable standard of living and wants to raise it to exactly $3,000. This can
be achieved by
a. restricting supply so that price increases to $4.
b. a price support of $5.
c. restricting supply so that price increases to $5.
d. any of the above
77. Refer to Exhibit 39-4. The price elasticity of demand for wheat between the prices of $3 and $4 is
a. equal to 1.
b. less than 1.

c. greater than 1.
d. equal to 100.
e. c and d
78. Refer to Exhibit 39-4. The price support of $6 per bushel results in private citizens spending
__________ on wheat.
a. $600
b. $3,000
c. $3,600
d. $4,800
e. $6,600
79. Refer to Exhibit 39-4. The price support of $6 per bushel would cost the government
a. $600.
b. $3,000.
c. $3,600.
d. $4,800.
e. $6,600.
80. Refer to Exhibit 39-4. If the government sets a target price at $5 per bushel, the quantity of wheat
produced will be
a. 600 bushels.
b. 700 bushels.
c. 800 bushels.
d. 900 bushels.
e. 1,000 bushels.
81. Refer to Exhibit 39-4. If the government sets a target price at $5 per bushel, consumers will end up
paying __________ for the quantity of wheat they purchase.
a. $1,000
b. $2,000
c. $3,000
d. $4,000
e. $5,000
82. Refer to Exhibit 39-4. At the government-established support price of $5 per bushel, the wheat surplus
that government buys equals
a. 600 bushels.
b. 400 bushels.
c. 200 bushels.
d. 0 bushels.
83. Refer to Exhibit 39-4. At a target price of $4 per bushel, how many bushels of wheat are produced?
a. 900
b. 800
c. 700
d. 600
84. Refer to Exhibit 39-4. At a target price of $4 per bushel, what price does the consumer pay?
a. $5
b. $4
c. $3
d. $2
85. Refer to Exhibit 39-4. At a target price of $4 per bushel, how much does the private sector spend on
wheat?
a. $2,400
b. $1,800
c. $2,800
d. $3,600
86. Refer to Exhibit 39-4. Under a price support program of $4 per bushel, how many bushels of surplus
wheat does the government purchase?
a. 0
b. 200
c. 700
d. 900

Exhibit 39-5
87. Refer to Exhibit 39-5. Low price elasticity of demand for corn coupled with unpredictable weather
makes both price and total revenue in the market for corn extremely volatile. Which of the supply
curves would result in the least volatility?
a. S1.
b. S2.
c. S3.
d. The changes are not dependent upon elasticity of supply.
88. Stating that income elasticity of demand for potatoes equals 0.15 is equivalent to stating that if income
a. decreases by 10 percent, potato purchases decrease by 1.5 percent.
b. increases by 10 percent, potato purchases increase by 15 percent.
c. decreases by 1.5 percent, potato purchases decrease by 10 percent.
d. increases by 15 percent, potato purchases decrease by 10 percent.
Exhibit 39-6

89. Refer to Exhibit 39-6. A major change in weather conditions favorable to the production of X will shift
the supply curve for X from its original position. The consequent change in price and total revenue
would be less sharp if the demand curve for X is __________ because it is __________ over the
relevant region.
a. D1; more elastic than D2
b. D1; more inelastic than D2
c. D2; more elastic than D1
d. D2; more inelastic than D1
90. If the government attempts to aid farmers by implementing a policy that results in a leftward shift in
the supply curve of agricultural products, the policy in question is most likely
a. a price support.
b. an acreage allotment program.
c. a target price.
d. any of the above
Exhibit 39-7

91. Refer to Exhibit 39-7. Let E1 represent the initial equilibrium in the market for X. A combination of
population growth and an increase in agricultural productivity will likely result in a new equilibrium at
a. E2.
b. E3.
c. E4.
d. E5.
e. E4 or E5, depending on the extent of income elasticity of demand.
ANS: E PTS: 1 DIF: Difficulty: Challenging
92. Refer to Exhibit 39-7. Let E1 represent the initial equilibrium in the market for X. Population growth
combined with the widely publicized results of medical research extolling the virtues of consuming X
will, ceteris paribus, result in a new equilibrium at
a. E2.
b. E3.
c. E4.
d. E5.
e. E4 or E5, depending on the extent of income elasticity of demand.
Exhibit 39-8

93. Refer to Exhibit 39-8. Assume that E1 represents the initial equilibrium in the market for grain X. As a
result of a breakthrough in genetic engineering that develops an insect-resistant variety of grain X,
a. the supply curve shifts leftward.
b. the equilibrium quantity increases.
c. the equilibrium price rises.
d. all of the above
e. a and c
94. Refer to Exhibit 39-8. Assume that E1 represents the initial equilibrium in the market for grain X. As a
result of increased agricultural productivity, total revenues for farmers in this market will
a. increase if the demand curve is perfectly inelastic.
b. increase if the demand curve is inelastic between E 1 and E2.
c. decrease if the demand curve is inelastic between E 1 and E2.
d. decrease if the demand curve is inelastic between E 1 and E3.
95. Refer to Exhibit 39-8. Assume that E1 represents the initial equilibrium in the market for grain X. If all
the farmers agree to restrict production and abide by the agreement,
a. the price of X increases.
b. the equilibrium quantity decreases.
c. total revenues increase if the demand curve is inelastic between E 1 and E3.
d. all of the above
e. a and b only
96. Assume that the farmers know that their revenues would increase if each would take a certain amount
of acreage out of production. An agreement to do so
a. would not be made because the farmers have no incentive to enter into it.
b. would not be made because it would contradict the assumption that farmers are profit
maximizers.
c. probably would not be adhered to, if made, because it would be disadvantageous for the
farmers as a group.
d. probably would not last, if made, because each farmer would have an incentive to break it.
NAT: BUSPROG: Analytic LOC: DISC: The role of incentives
97. A potato farmer who signs a futures contract is

a. speculating on the future price of potatoes, hoping it will be higher.
b. speculating on the future price of potatoes, hoping it will be lower.
c. eliminating his exposure to risk from a falling potato price.
d. trying to influence the price of potatoes to rise.
98. If a farmer rents the land he works on, then any price support or deficiency payments he receives
__________ capitalized into the value of that land, and so his economic profit from farming
__________.
a. are; goes to zero
b. are; remains positive
c. are not; goes to zero
d. are not; remains positive
99. Rising demand for an agricultural good __________ the payments government is committed to pay
farmers under a __________ program.
a. raises; production flexibility contract
b. raises; deficiency payment
c. lowers; production flexibility contract
d. lowers; deficiency payment
100. An increase in the supply of corn will lower the total revenue from corn if
a. the demand curve for corn is inelastic between the current and new price of corn.
b. the demand curve for corn is elastic between the current and new price of corn.
c. there are many substitutes for corn.
d. there are only a few substitutes for corn.
101. Suppose the demand curve for corn is inelastic between the current price and price that exists after the
supply of corn falls. It follows that
a. fewer farmers are producing corn at the new price than at the old price.
b. the total revenue for corn is lower at the new price than at the old price.
c. the total revenue for corn is higher at the new price than at the old price.
d. more farmers are producing corn at the new price than at the old price.
e. a and c
102. The productivity of the agriculture sector (of the economy) increases dramatically. A likely
consequence is:
a. increased resources flowing into the agriculture sector.
b. an increase in the supply of foodstuffs and lower prices for foodstuffs.
c. an increase in the total revenue (farmers' receive) from selling foodstuffs, assuming the
demand for their products is elastic.
d. a decrease in the total revenue (farmers' receive) from selling foodstuffs, assuming the
demand for their products is inelastic.
103. Which of the following statements represents a correct sequence of events?

a. Productivity rises in the agriculture sector, the supply curve of foodstuffs shifts to the left,
price rises, and total revenue rises assuming demand is inelastic.
b. Productivity rises in the agriculture sector, the supply curve of foodstuffs shifts to the
right, price rises, and total revenue rises assuming demand is inelastic.
c. Productivity rises in the agriculture sector, the supply curve of foodstuffs shifts to the
right, price falls, and total revenue falls assuming demand is elastic.
d. Productivity rises in the agriculture sector, the supply curve of foodstuffs shifts to the left,
price falls, and total revenue rises assuming demand is elastic.
ANS: C PTS: 1 DIF: Difficulty: Challenging
104. Suppose farmers agree to reduce their supply of foodstuffs. The most likely reason they would want to
do this is they believe that less supply
a. means higher prices and higher total revenue.
b. means consumers will buy more of what they have to sell.
c. translates into higher-quality foodstuffs and that the higher the quality of the foodstuffs
they sell, the higher the prices for what they sell.
d. will get Congress to favor them with agriculture subsidies.
e. will get Congress to decrease their taxes.
105. Assuming the demand for their products is inelastic, farmers (as a group) have an incentive to
a. increase the supply of what they sell.
b. agree among themselves to decrease the supply of what they sell.
c. spend at least 10 percent of their budgets to advertise their products.
d. b and c
e. a and c
106. Studies shows that income elasticity of demand for food is

a. less than 1, but greater than 0.
b. more than 1, but less than 2.
c. less than 0.
d. more than 2.
107. If income elasticity of demand for food is 1.75 it follows that

a. a 10 percent rise in the price of food lowers the quantity demanded of food by 17.5
percent.
b. if income rises by 10 percent, consumption of food rises by 17.5 percent.
c. if income rises by 10 percent, consumption of food falls by 17.5 percent.
d. a 1 percent rise in the price of food decreases the quantity demanded of food by 1.75
percent.
108. If real income rises in the economy and, at the same time, productivity in the agriculture sector rises,
too, then it follows that the demand for food will
a. rise (assuming that income elasticity of demand for food is greater than 1) and the supply
of food will remain constant.
b. rise (assuming that income elasticity of demand for food is greater than 0) and the supply
of food will increase, too.
c. fall (assuming that income elasticity of demand for food is greater than 1) and the supply
of food will fall, too.
d. fall (assuming that income elasticity of demand for food is equal to 1) and the supply of
food will rise.
109. If market demand is inelastic and supply is subject to severe shifts from season to season, it follows
that
a. price changes are likely to be small.
b. price changes are likely to be large.
c. total revenue is likely to be constant over time.
d. total revenue is likely to be highly volatile.
e. b and d
110. Demand for a food item increases by more than the supply of the food item. One thing for certain is
that
a. the price of the food item rises.
b. income elasticity of demand (for the food item) is greater than 1.
c. the supply curve is price elastic.
d. real income rises as a result.
111. Supply of a food item increases by more than the demand for the food item increases. One thing for
certain is that
a. the price of the food item rises.
b. income elasticity of demand is less than 0.
c. the supply curve is price inelastic.
d. real income falls as a result.
112. Bad weather is likely to

a. raise the total revenue farmers receive for their foodstuffs, assuming that demand for their
products is inelastic.
b. lower the total revenue farmers receive for their foodstuffs, assuming that demand for their
products is elastic.
c. leave the total revenue farmers receive for their foodstuffs unchanged.
d. change the income elasticity of demand for food.
e. c and d
113. The change in the price of a foodstuff will be greater,

a. the smaller the change in the supply of the foodstuff.
b. the greater the change in the supply of the foodstuff and the more inelastic the demand
curve for the foodstuff.
c. the lesser the change in the supply of the foodstuff and the more inelastic the demand
curve for the foodstuff.
d. the greater the change in the supply of the foodstuff and the more elastic the demand curve
for the foodstuff.
e. the lesser the change in the supply of the foodstuff and the more elastic the demand curve
for the foodstuff.
114. The price of a foodstuff falls and the total revenue (received by farmers for selling the foodstuff) rises.
What could explain this?
a. Increased supply and elastic demand.
b. Real income rises and the foodstuff is an inferior good.
c. Real income rises and the foodstuff is a normal good.
d. Increased supply and inelastic demand.
115. Farmers can insure themselves against adverse price swings through the __________ market.
a. bond
b. stock
c. futures
d. food
116. Which of the following statements is false?

a. There are fewer farms in this country today than there were earlier in this century.
b. In 2000, there were 8 million farms in the United States.
c. Bad weather reduces the supply of foodstuffs and leads to greater farmer total revenue,
assuming demand for the foodstuffs is inelastic.
d. b and c

117. If the demand for foodstuffs is inelastic, which of the following positions would be most beneficial to
Farmer Jones?
a. Bad weather for Jones and good weather for all other farmers.
b. Bad weather for all farmers except Jones (who witnesses good weather).
c. Bad weather for all farmers.
d. Good weather for all farmers.
e. There is not enough information to answer the question.
118. Here are four positions that Farmer Gomez can be in: (1) bad weather for Gomez and good weather
for all other farmers; (2) bad weather for all farmers except Gomez (who witnesses good weather); (3)
bad weather for all farmers; (4) good weather for all farmers. Assuming the demand for foodstuffs is
inelastic, Farmer Gomez would probably rank these four positions, from best for him to worst for him,
the following way:
a. 1,2,3,4
b. 2,1,3,4
c. 2,3,4,1
d. 4,3,2,1
e. 3,4,1,2
119. An agricultural price support

a. will create a surplus in the relevant market, assuming the price support is above
equilibrium price.
b. will create a shortage in the relevant market, assuming the price support is above
equilibrium price.
c. is an example of a price floor.
d. will lead to greater total revenue for farmers if demand (for the product) farmers sell is
inelastic between the equilibrium price and the price support (and assuming the price
support is above equilibrium price).
e. a, c, and d
120. One of the consequences of an agricultural price support program is

a. a surplus.
b. more exchanges made at the price support.
c. lower prices paid by consumers.
d. lower taxes for taxpayers.
e. a and c
121. As a result of an agricultural price support,
a. quantity demanded is greater than quantity supplied.
b. quantity supplied is greater than quantity demanded.
c. fewer exchanges are made.
d. a and c
e. b and c
122. Which of the following directly (as opposed to indirectly) raises the price of agricultural products?
a. marketing quota system
b. acreage allotment program
c. paying farmers not to produce
d. price supports
e. all of the above
123. Which of the following is true?

a. In a price support program, consumers end up paying the price support.
b. In a target price system, consumers end up paying the target price.
c. In a target price system, the per-unit deficiency payment is equal to the difference between
the quantity demanded at the market price and the quantity supplied at the market price.
d. Acreage allotment programs directly (as opposed to indirectly) raise agricultural product
prices.
e. b and d
124. A farmer has 1,000 acres on which he has previously grown corn. His yield per acre is 100 bushels of
corn. If the corn payment rate is $0.43 a bushel, his production flexibility contract payment equals
a. $39,600.
b. $43,000.
c. $36,550.
d. $12,345.
125. A farmer has 500 acres on which he has previously grown corn. His yield per acre is 100 bushels of
corn. If his production flexibility contract payment is $21,250, then what is the corn payment rate?
a. $0.45
b. $0.67
c. $0.50
d. $0.10
126. The formula for determining the production flexibility contract payment is:
a. contract acreage x 0.75 x yield per acre x crop payment rate.
b. contract acreage x 0.85 x yield per acre x $1.
c. contract acreage x 0.85 x yield per acre x crop payment rate.
d. contract acreage - (0.85 x contract acreage) x yield per acre x crop payment rate.
e. There is no formula for the production flexibility contract payment. There is only a flat fee
that changes annually.
127. Which of the following statements is true?

a. There are more farms today than at the beginning of the 20th century.
b. An individual farmer prefers good weather to bad weather, but farmers as a group may
prefer bad weather to good weather, especially if the demand for their products is inelastic.
c. Income elasticity of demand measures the responsiveness of a change in quantity supplied
to changes in income.
d. a and b
e. b and c
Exhibit 39-9
128. Refer to Exhibit 39-9. Under a target price system, with the target price set at P 1, the price at which
consumers will buy the food item is
a. P1.
b. P2.
c. P3.
d. P4.
129. Refer to Exhibit 39-9. Under a target price system, with the target price set at P 1, the per-unit
deficiency payment will be:
a. P2 - P4.
b. P1 - P3.
c. P2 - P3.
d. P1 - P2.
130. Refer to Exhibit 39-9. Under a price support program, with the price support set at P 1, consumers will
end up paying a price of
a. P1.
b. P2.
c. P3.
d. P4.
131. At the beginning of the 20th century one farmer in the U.S. produced enough to feed ____________
people, and at the end of the century, one farmer produced enough to feed ____________ people.
a. 20; 40
b. 7; 15
c. 12; 42
d. 8; 35
TRUE/FALSE
1. Under a target price system, the government can adjust the deficiency payment paid to a farmer by
deciding to pay some percentage of the difference between the target price and the market price.
ANS: T PTS: 1 DIF: Difficulty: Moderate

2. Agriculture productivity has increased more rapidly in the U.S. than has nonagriculture productivity.
ANS: T PTS: 1 DIF: Difficulty: Easy

3. In 1930, agriculture accounted for 10 percent of the U.S. GDP; in 2000, it accounted for only 5 percent
of the GDP.
ANS: F PTS: 1 DIF: Difficulty: Moderate

NAT: BUSPROG: Analytic LOC: DISC: Measuring the Economy
4. For farmers as a group, increased productivity can lead to lower incomes.

5. Increased productivity in agriculture leads to lower prices for consumers and higher revenues for
farmers.

6. When productivity increases in the production of agricultural products, the supply curve for
agricultural products shifts rightward.
ANS: T PTS: 1 DIF: Difficulty: Easy

7. In the U.S., studies have shown that as real incomes have risen, per capita demand for food has been
increasing by much less.

8. The combination of income elasticity of demand for food and high agricultural productivity leads to
the demand for food increasing and the supply of food increasing even more, which has lead to rising
prices of food.

9. The price elasticity of demand for many agricultural products is (absolute value) less than 1, meaning
that these products are inelastic in demand.

10. Unlike in the 1930s, farmers today can insure themselves against price swings that would impact them
adversely through the futures market.

11. Farmers as a group generally prefer bad weather to good weather because bad weather shifts the
demand curve for their product rightward and raises the price of their product.

12. An agricultural price support is an example of a price ceiling.

13. When the government implements an agricultural price support (above the equilibrium price), a
surplus results and the government buys the surplus at the support price.

14. In 2002, the federal government replaced production flexibility contract payments to farmers with
fixed direct payments, which basically work the same way as the former payment system.

15. The major way that the government supports crop prices is by granting nonrecourse loans to farmers.

ESSAY

1. Explain how nonrecourse loans operate and how they help to support crop prices.
ANS:
A nonrecourse loan is the major way the government supports crop prices. To get a nonrecourse loan,
a farmer must pledge a quantity of a given commodity. The amount of the loan is equal to the given
quantity of the commodity multiplied by a designated rate per unit called the loan rate. The farmer
can either repay the loan amount with interest, or keep the loan and forfeit the pledged commodity.
The option chosen by the farmer depends on the market price of the commodity relative to the loan
rate. If the market price is higher than the loan rate, then the farmer will be better off to pay back the
loan and sell the commodity at the market price. On the other hand, if the loan rate is higher than the
market price the farmer would be better off to keep the loan and forfeit the commodity. In this way,
the farmer has been guaranteed a price that is equivalent to the loan rate.
PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic

LOC: DISC: The role of government KEY: Bloom's: Application
2. Explain how the combination of major changes in the weather and price inelasticity of demand for a
food item can lead to wide fluctuations in a farmers income from year to year.
ANS:
Major changes in the weather can impact the supply of an agricultural product. If the weather is
favorable, the supply curve for the crop will shift to the right, lowering the price of the crop. If the
weather is unusually bad, the supply curve for the crop will shift to the left, raising the price of the
crop. In addition, if demand for the product is inelastic, then quantity demanded will not change very
much in relation to any given price change. Thus, if unusually good weather leads to a large decrease
in the price of the crop, the quantity demanded will not change by a very large percentage, and the
farmers total revenue will drammatically decrease. On the other hand, if unusually bad weather raises
the price of the crop substantially, there will be a relatively small decrease in quantity demanded, and
the farmers total revenue will drammatically rise.

LOC: DISC: Elasticity KEY: Bloom's: Application
3. Explain how the purchase of futures contracts can help to insure a farmer against adverse swings in the
prices of the crops that he grows.
ANS:
To avoid the risk of lower prices in the future, a farmer can enter into a futures contract with someone
who will guarantee to take delivery of the crop in the future for a stated price. The farmer then shifts
the risk of price fluctuations onto the purchaser of the futures contract, which helps to stabilize his
future income.

LOC: DISC: Markets, market failure, and externalities KEY: Bloom's: Application


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Chapter 39-Agriculture: Problems, Policies, and Unintended Effects

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Chapter 39Agriculture: Problems, Policies, and Unintended Effects

1. During the twentieth century, the U.S. farm sector experienced

2014 Cengage Learning. All Rights Reserved. May not be

10. Which of the following statements is true?

14. Studies show that, in the United States,

16. During much of the 20th century, agricultural product prices

28. Under an acreage allotment program,

30. Which of the following is not an effect of an agricultural price support?

2014 Cengage Learning. All Rights Reserved. May not be

32. Under a marketing quota system,

37. Under the target price program,

44. In general, agricultural price supports

45. Under the target price system,

46. Supply-restricting policies are intended to shift the

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50. Agricultural price supports refer to

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56. The acreage allotment program involves

69. When the government institutes a target price,

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71. Refer to Exhibit 39-3. If P3 is a target price, the quantity supplied is

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2014 Cengage Learning. All Rights Reserved. May not be

97. A potato farmer who signs a futures contract is

103. Which of the following statements represents a correct sequence of events?

106. Studies shows that income elasticity of demand for food is

107. If income elasticity of demand for food is 1.75 it follows that

112. Bad weather is likely to

113. The change in the price of a foodstuff will be greater,

116. Which of the following statements is false?

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119. An agricultural price support

120. One of the consequences of an agricultural price support program is

123. Which of the following is true?

127. Which of the following statements is true?

ANS: T PTS: 1 DIF: Difficulty: Moderate

ANS: T PTS: 1 DIF: Difficulty: Easy

ANS: F PTS: 1 DIF: Difficulty: Moderate

4. For farmers as a group, increased productivity can lead to lower incomes.

ANS: T PTS: 1 DIF: Difficulty: Moderate

ANS: F PTS: 1 DIF: Difficulty: Moderate

ANS: T PTS: 1 DIF: Difficulty: Easy

ANS: T PTS: 1 DIF: Difficulty: Moderate

ANS: F PTS: 1 DIF: Difficulty: Moderate

ANS: T PTS: 1 DIF: Difficulty: Moderate

ANS: T PTS: 1 DIF: Difficulty: Moderate

ANS: F PTS: 1 DIF: Difficulty: Moderate

12. An agricultural price support is an example of a price ceiling.

ANS: F PTS: 1 DIF: Difficulty: Moderate

ANS: T PTS: 1 DIF: Difficulty: Moderate

ANS: T PTS: 1 DIF: Difficulty: Moderate

ANS: T PTS: 1 DIF: Difficulty: Moderate

2014 Cengage Learning. All Rights Reserved. May not be

PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic

PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic

PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic

2014 Cengage Learning. All Rights Reserved. May not be

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