CHAPTER 19 MICRO QUIZ
Use the following diagram of the U.S. corn market to answer the next question. Refer to the diagram: Prior to 1996, U.S. farm policy would most likely have: A) raised price to B, resulting in a surplus B) lowered price to M, resulting in a shortage C) lowered price to M, resulting in a surplus D) left price at A, reflecting a laissez-faire policy
A In an effort to maintain farm incomes, U.S. policy supported prices through a variety of programs, raising the price of corn. All else equal, the higher price reduced domestic consumption and increased domestic production, resulting in a surplus.
Since 1960, total farm employment has: A) decreased both absolutely and as a proportion of total employment B) increased absolutely, but decreased as a proportion of total employment C) remained about the same, but decreased as a proportion of total employment D) fallen in relation to manufacturing employment, but risen in relation to service employment
A Since 1960, total farm employment has fallen from 11% of the labor force to about 2%.
The demand for most agricultural products: A) has decreased over time as incomes have increased B) has increased at the same rate as the increase in the population C) has increased slower than the increase in supply D) is elastic
A Technological advances have increased supply far faster than demand, resulting in falling prices (in real terms) for most agricultural products.
Use the following diagrams to answer the next question. Refer to the diagrams. Which diagram best illustrates the long-run impacts of changes in technology and U.S. population on total farm production and prices? A) A B) B C) C D) D
A The long-run trend is a result of substantial increases in supply caused by technological advance coupled with demand increases that have just kept pace with relatively slow population growth. As a result, inflation-adjusted farm prices have fallen substantially while total output has increased modestly.
An increase in the prices paid by farmers coupled with a decrease in the prices they receive will: A) reduce the parity ratio B) trigger automatic increases in tariffs on imported agricultural products C) increase real farm incomes D) put political pressure on Congress to reduce farm subsidies
A The parity ratio measures the prices farmers receive relative to the prices they pay. The higher the prices paid and the lower the prices received, the lower the parity ratio.
U.S. farm policy: A) lowers the price of farm land, hurting landowners relative to tenant farmers B) directs farm aid disproportionately to high-income farmers C) provides retraining and transitional support to farmers willing to leave the industry D) results in an underallocation of resources to farming
B : Payments have historically been linked to production levels, not to farm incomes. Accordingly, wealthy farmers with large output received the bulk of the aid. In addition, the subsidies resulted in higher land values, benefiting the wealthy absent landowner at the expense of the tenant farmer.
The 1996 Freedom to Farm Act: A) ended all agricultural price supports B) was partially "undone" by emergency aid payments to farmers beginning in 1998 and 1999 C) allowed farmers to plant as much as they desired, but restricted which crops they could plant D) increased price supports on grain while removing them from sugar and tobacco
B Reduced export demand and good crops resulted in lower prices and political pressure to increase subsidies. Total farm subsidies averaged more from 1999 - 2000 than prior to passage of the act.
Which of the following government programs stimulates demand in order to reduce agricultural surpluses created by farm subsidies? A) Farm Act of 2002 B) Food for Peace C) Freedom to Farm Act of 1996 D) Import quotas and tariffs
B The Food for Peace program allows developing countries to buy U.S. food exports with domestic currencies, which increases export demand.
The 1996 law ending price supports on wheat, corn, and other crops was known as the: A) Parity Act B) Freedom to Farm Act C) Farm Act D) Farmer Independence Act
B The Freedom to Farm Act of 1996 also ended acreage allotments and allowed farmers to plant crops of their choice, responding to economic incentives.
For farm products in the aggregate, demand elasticity is between: A) .01 and .02 B) .2 and .25 C) .9 and 1.0 D) 1.5 and 1.6
B The demand is quite (but not perfectly) inelastic, suggesting that a ten percent increase in production will depress prices by 40 to 50 percent.
Use the following diagrams to answer the next question. Refer to the diagrams. Which diagram best illustrates the dramatic year-to-year swings in farm income? A) A B) B C) C D) D
B This short-run variation in farm income is caused by year-to-year fluctuations in supply coupled with a very inelastic demand for agricultural products. The result is that even relatively small changes in farm output can lead to substantial changes in prices and gross farm incomes.
Over the long-run, the number of farm households has declined in part because: A) the demand for farm products is price-elastic B) the demand for farm products is inelastic with respect to both price and income C) farm productivity has increased at a much slower pace than in the manufacturing and service sectors D) government policies have resulted in chronic shortages in critical markets
B With income-inelastic demand, the demand for farm products has not increased at the same pace as increases in income. Coupled with substantial improvements in productivity and price-inelastic demand, inflation-adjusted farm prices have declined substantially over time, resulting in farm consolidation and the exodus of farmers to other sectors of the economy.
The demand for barley is inelastic. Accordingly, barley farmers' aggregate income will: A) rise in high-yield years and fall in low-yield years B) rise in low-yield years and fall in high-yield years C) rise over time D) fall over time
B With inelastic demand, a small increase in crop yield will cause the price to decrease substantially, reducing aggregate income. Likewise, a small decrease in crop yield will raise prices substantially and increase aggregate income.
Federal government programs such as food stamps and Food for Peace: A) increase the supply of food, lowering farm incomes B) reduce the supply of food, reducing the surpluses created by price supports C) increase the demand for food, reducing the surpluses created by price supports D) were phased out by the Freedom to Farm Act of 1996
C Agricultural price supports create surpluses of agricultural products. By providing subsidies for food purchases, the food stamp program increases the demand for agricultural products and reduces the size of the surpluses. Similarly, the Food for Peace program increases the demand for domestic farm products by reducing their cost to residents of developing countries.
U.S. agricultural price supports: A) increase domestic quantity demanded B) make domestic demand more inelastic C) disproportionately benefit large farmers D) reduce agricultural imports
C Because price supports reward production, most of the benefits are received by farmers with the highest incomes. Price supports also increase quantity supplied and reduce quantity demanded, resulting in a surplus. All else equal, the higher price also attracts imports.
Agricultural price supports do all of the following except: A) increase pollution by encouraging the use of more fertilizer and pesticides B) lead to trade barriers to prevent increased imports C) hasten the departure of resources from farming D) create surpluses of farm products
C Price supports make farming more profitable than it otherwise would be, artificially keeping resources in this sector.
In 1994, the nations belonging to the World Trade Organization agreed to reduce farm price support programs in order to: A) increase the amount of money available for foreign aid B) reduce agricultural overproduction by developing countries C) reduce economic distortions and international misallocation of agricultural resources D) reduce government deficits worldwide
C Support programs in advanced countries increase agricultural production, which spills over into international markets, depressing world prices. These lower world prices signal farmers in relatively low-cost producing nations to produce less than they otherwise would, resulting in a shift away from comparative advantage.
If in a certain year the indices of prices received and paid by farmers were 140 and 200 respectively, the parity ratio would be: A) 30 B) 60 C) 70 D) 1.43
C The parity ratio is the ratio of prices received to prices paid, expressed as a percentage: 140 / 200 = .70, or 70 percent.
All of the following are outcomes of U.S. farm price supports, except: A) world agricultural prices increase B) tariffs or quotas are necessary to prevent increased imports of agricultural products C) higher taxes are required to pay for government purchases of surplus production D) export earnings of developing countries are reduced
C U.S. farm price supports increase prices of domestic agricultural products. Attracted by these high prices, foreign farmers would add to domestic production were it not for tariffs and quotas. The increased output by domestic farmers leads to lower world prices and reduced export earnings of developing countries.
U.S. farmers' incomes are unstable in the short run, primarily owing to: A) changes in price support programs with each new congress B) fluctuations in U.S. agricultural imports that have caused wide swings in prices of food products C) swings in crop yields and export demand, coupled with inelastic demand D) rapid changes in technology coupled with slow population growth
C With inelastic demand, even a small change in crop yield will bring about a relatively large change in price. In addition, the U.S is increasingly dependent on world markets; demand responds to cyclical changes in world income, resulting in volatile U.S. market prices and farm incomes.
Use the following diagram of the corn market to answer the next question. Assume both the demand and the supply of corn are inelastic. Refer to the diagram. If the government supports price B in this market, all of the following will result except: A) a surplus of LG is created B) total farm income increases from OAJH to OBCG C) government transfers LKCG from taxpayers to farmers D) aggregate consumer expenditures on corn decrease
D Because demand is inelastic, the higher price increases consumer expenditure on corn (area OBKL exceeds area OAJH). Of the total amount of farm income, OBKL is paid by consumers and LKCG is paid by the government.
Use the following diagram to answer the next question. Refer to the diagram. Qp, Qn and Qb correspond to poor, normal, and bumper crop levels, respectively. Compared to a normal year, if farmers produce a bumper crop, gross farm income will: A) increase because demand is elastic B) decrease because demand is inelastic C) increase because demand is inelastic D) decrease because demand is inelastic
D Gross farm income in a normal year is given by area OPnNQn. In a bumper year, gross farm income is OPbBQb, substantially less. This indicates that demand is inelastic.
Because the marginal utility of food diminishes rapidly: A) the supply of agricultural products is elastic B) the supply of agricultural products is inelastic C) the demand for agricultural products is elastic D) the demand for agricultural products is inelastic
D In a relatively high-income economy, the population is fed sufficient for its needs; large price reductions are required to induce even small increases in food consumption.
Which of the following changes in the markets for agricultural products best illustrates markets for farm products over the long-run? A) Large increases in demand and small increases in supply B) Large increases in demand and large increases in supply C) Small increases in demand and small increases in supply D) Small increases in demand and large increases in supply
D Technological advances have dramatically increased supply, while demand has just kept pace with increases in population, resulting in falling inflation-adjusted prices for farm products.
The Agricultural Adjustment Act of 1933: A) allowed individuals to acquire farmland from the federal government if they consented to "homestead" B) began the federal practice of subsidizing crops produced for export C) established maximum prices farmers have to pay for fertilizer, seed, and other basic inputs D) established the parity concept as a basis for agricultural policy
D The parity concept suggests that the relationship between the prices farmers must pay for goods and services and the prices they receive for their crops should remain constant.
If in a certain year the indices of prices received and paid by farmers were 120 and 150, respectively, the parity ratio would be: A) 30 B) 125 C) 20 D) 80
D The parity ratio is the ratio of prices received to prices paid, expressed as a percentage: 120 / 150 = .80, or 80 percent.
Which best expresses the concept of parity? A) Total farm employment should remain the same over time B) Agricultural prices should remain constant over time C) Farm income should increase at the same rate as the total population D) Prices of farm products should increase at the same rate as the prices farmers pay for goods and services
D The parity ratio is the ratio of the prices farmers receive relative to the prices they pay. If the parity ratio is constant, a constant amount of farm output will result in constant real incomes for farmers.
The average income of farm households is substantially below that of non-farm households. A) True B) False
FALSE In 2004, the average annual income of farm-households exceeded that of non-farm households by over $20,000.
Government agricultural policy has resulted in a more rapid exodus from farm employment than would otherwise have been the case. A) True B) False
FALSE The government's policy of price supports have increased the payoff to farming and slowed the departure of labor and other resources from the agricultural sector.
Because farmers' fixed costs are high compared to their variable costs, short-run farm production is relatively insensitive to price changes. A) True B) False
TRUE Most farm costs are fixed: mortgage payments, interest, rent, and taxes. As a result, farmers continue to produce in the short run as long as prices cover their relatively inconsequential variable costs.