Quiz 1 - Chapter 33 Agriculture: Economics and Policy 1. 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 conceptual relationship between the prices farmers receive and the prices they must pay Answer: d Feedback: This concept is known as parity, and 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. 2. 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 Answer: d Feedback: 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. 3. The demand for most agricultural products: a. has decreased over time as incomes have increased b. has increased faster than the increase in the population c. has increased slower than the increase in supply d. is elastic Answer: c Feedback: Technological advances have increased supply far faster than demand, resulting in falling prices (in real terms) for most agricultural products. 4. 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 Answer: a Feedback: 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. 5. In 1994, the world’s trading nations 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 Answer: c Feedback: 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. 6. 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 Answer: b Feedback: The Freedom to Farm Act of 1996 also ended acreage allotments and allowed farmers to plant crops of their choice, responding to economic incentives. 7. 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 Answer: d Feedback: The parity ratio is the ratio of prices received to prices paid, expressed as a percentage: 120 / 150 = .80, or 80 percent. 8. 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 Answer: c Feedback: 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. 9. True or false: The parity concept fueled the political decisions to reduce and remove some agricultural price supports in the 1990s. a. True b. False Answer: b Feedback: The parity concept provides a rationale for continued price supports. This ratio of farmer prices received to prices paid has fallen consistently since the mid 1940s. 10. 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 Answer: b Feedback: The demand is quite (but not perfectly) inelastic, suggesting that a ten percent increase in production will depress prices by 40 to 50 percent.