Competitive Markets and Agriculture
True/False Questions
1. The law of supply states that producers will supply less of a product at a lower price.
ANSWER: T
2. An equilibrium exists when there is no reason for a situation to change.
ANSWER: T
3. An increase in the price of milk will cause an increase in the amount of milk demand.
ANSWER: F
4. Cars and tires are examples of substitute goods.
ANSWER: F
5. An increase in the price of Big Macs will cause the demand for Whoppers, a substitute,
to fall.
ANSWER: F
6. An increase in demand is represented as a rightward shift in the demand curve.
ANSWER: T
7. If an increase in income causes the demand for steak to fall, then steak is an inferior
good.
ANSWER: T
8. A change in income will cause a change in the supply of cattle.
ANSWER: F
9. A decrease in supply is represented as a rightward shift of the supply curve.
ANSWER: F
10. An advance in technology in the production of cheese will cause an increase in the
supply of cheese.
ANSWER: T
11. If the market is in equilibrium, then quantity demanded and quantity supplied will be
equal.
ANSWER: T
12. Suppose the equilibrium price of oranges is $1.25 per pound. If the current price is
$1.50, an excess demand will exist.
ANSWER: F
13. Bananas are a normal good. An increase in income will cause the equilibrium price and
quantity of bananas to fall.
ANSWER: F
14. If demand for a product decreases, there will be excess supply at the original equilibrium price.
ANSWER: T
15. Suppose the price of wheat used in producing bread decreases. The equilibrium price of bread
will decrease and the equilibrium quantity of bread will increase.
ANSWER: T
16. Suppose demand and supply both increase. We do not know how equilibrium quantity will
respond.
ANSWER: F
17. Increases in the supply of agriculture products have led to a downward trend in the prices of
agriculture products.
ANSWER: T
18. The quantity of farm products demanded is very responsive to price changes.
ANSWER: F
19. As the price of farm products has fallen, the demand for farm labor has increased.
ANSWER: F
20. A program of marketing orders tends to raise price in the primary market and lower price in the
secondary market.
ANSWER: T
21. A price support sets a maximum price that can be charged for a product.
ANSWER: F
22. Price supports result in excess supply.
ANSWER: T
23. The existence of economic profits has been one reason for government regulation of agriculture.
ANSWER: F
24. Output constraints have been very successful in reducing the supply of farm products.
ANSWER: F
25. The decline of the family farm has been the result of technical and economic forces that would be
difficult to reverse.
ANSWER: T
26. Members of Congress trading votes to pass legislation of interest to each other is called
“Logrolling.”
ANSWER: T
27. A competitive market is one where there are no barriers to entry, and there are many buyers and
many sellers.
ANSWER: T
28. A competitive market is one where there are no barriers to entry, and there are many buyers and
one seller.
ANSWER: F
Multiple-Choice Questions
1. The law of demand states that holding everything else constant:
a. consumers will be willing to buy more of a product at a lower price.
b. consumers will be willing to buy more of a product when their income increases.
c. consumers will be willing to buy more of a product at a higher price.
d. consumers will be willing to buy more of a product when they need it.
ANSWER: a
2. The law of supply states that holding everything else constant:
a. producers will be willing to sell more of a product at a lower price.
b. producers will be willing to sell more of a product at a higher price.
c. producers will be willing to sell more of a product when costs are low.
d. producers will be willing to sell more of a product that consumers want.
ANSWER: b
3. Equilibrium exists when:
a. consumers can’t purchase all of a product they desire.
b. firms can’t sell all of the output they have produced.
c. there is no tendency for price to change.
d. there is a tendency for price to rise.
ANSWER: c
4. An increase in quantity demanded may be represented graphically as:
a. a leftward shift in the demand curve.
b. a rightward shift in the demand curve.
c. a movement upward along the demand curve.
d. a movement downward along the demand curve.
ANSWER: d
5. A decrease in quantity demanded may be represented graphically as:
a. a leftward shift in the demand curve.
b. a rightward shift in the demand curve.
c. a movement upward along the demand curve.
d. a movement downward along the demand curve.
ANSWER: c
6. An increase in demand is represented graphically as:
a. a leftward shift in the demand curve.
b. a rightward shift in the demand curve.
c. a movement upward along the demand curve.
d. a movement downward along the demand curve.
ANSWER: b
7. A decrease in demand is represented graphically as:
a. a leftward shift in the demand curve.
b. a rightward shift in the demand curve.
c. a movement upward along the demand curve.
d. a movement downward along the demand curve.
ANSWER: a
8. Suppose there is an decrease in Sean's income. If steak is a normal good:
a. there will be an increase in Sean's demand for steak.
b. there will be an increase in the quantity of steak demanded by Sean.
c. Sean's demand curve for steak will shift to the left.
d. there will be an increase in the supply of milk.
ANSWER: c
9. Suppose spaghetti is an inferior good. An increase in income will cause:
a. a rightward shift of the demand curve for spaghetti.
b. a leftward shift of the demand curve for spaghetti.
c. a movement upward along the demand curve for spaghetti.
d. a movement downward along the demand curve for spaghetti.
ANSWER: b
10. Suppose cheese is a normal good. An increase in income will cause:
a. a rightward shift of the demand curve for cheese.
b. a leftward shift of the demand curve for cheese.
c. a movement upward along the demand curve for cheese.
d. a movement downward along the demand curve for cheese.
ANSWER: a
11. Suppose cookies and milk are complements. A decrease in the price of milk will lead to:
a. a decrease in the quantity of cookies demanded.
b. an increase in the demand for cookies.
c. an decrease in the demand for cookies.
d. a decrease in the demand for milk.
ANSWER: b
12. A decrease in the price of tennis racquets will lead to:
a. a decrease in demand for tennis balls.
b. an increase in demand for tennis balls.
c. no change in supply for tennis balls.
d. a increase in the demand for tennis racquets.
ANSWER: b
13. An increase in the price of tennis racquets will lead to:
a. a decrease in demand for tennis balls.
b. an increase in demand for tennis balls.
c. no change in supply for tennis balls.
d. a increase in the demand for tennis racquets.
ANSWER: a
14. Suppose good 1 and good 2 are complements. If the price of good one decreases, this will cause:
a. a decrease in demand for good 1.
b. an increase in demand for good 2.
c. an increase in the demand for good 1.
d. a decrease in demand for good 2.
ANSWER: b
15. An increase in the price of butter will lead to:
a. a decrease in demand for margarine.
b. an increase in demand for margarine.
c. no change in supply for margarine.
d. a increase in the demand for butter.
ANSWER: b
16. All of the following will cause a shift in the demand curve for beef except:
a. a change in income.
b. a change in the price of a complement.
c. a change in the price of a substitute.
d. a change in the price of beef.
ANSWER: d
17. Which of the following could cause an increase in demand?
a. a decrease in the price of the good.
b. a decrease in the price of a complement.
c. a decrease in the price of a substitute.
d. an advance in technology.
ANSWER: b
18. The law of supply states that holding everything else constant:
a. producers will be willing to supply more of a good at a higher price.
b. producers will be more efficient when government regulates less.
c. producers are very responsive to profits.
d. producers will be willing to supply more of a good at a lower price.
ANSWER: a
19. An increase in quantity of wheat supplied would be caused by:
a. an increase in the price of wheat.
b. a decrease in the price of wheat.
c. a decrease in the cost of farm labor.
d. an increase in technology.
ANSWER: a
20. An increase in quantity supplied is represented graphically as:
a. a rightward shift of the supply curve.
b. an upward movement along the supply curve.
c. a downward movement along the supply curve.
d. a leftward shift of the supply curve.
ANSWER: b
21. A decrease in quantity supplied is represented graphically as:
a. a rightward shift of the supply curve.
b. an upward movement along the supply curve.
c. a downward movement along the supply curve.
d. a leftward shift of the supply curve.
ANSWER: c
22. Which of the following is likely to result in a change in the supply of corn?
a. an increase in the price of land used to produce corn.
b. an increase in the price of wheat.
c. an increase in the price paid to the individuals who are hired to harvest the corn.
d. All of the above.
ANSWER: d
23. An increase in the supply of eggs would most likely be caused by:
a. a decrease in the price of eggs.
b. an increase in the price of eggs.
c. an increase in the price of chicken feed.
d. a decrease in the price of chicken feed.
ANSWER: d
24. All of the following would cause the supply of orange juice to change except:
a. an increase in the price of orange juice.
b. a decrease in the price of fertilizer used in orange groves.
c. a freeze in Florida that damaged the orange crop.
d. an increase in wages paid to orange pickers.
ANSWER: a
25. An increase in supply means that:
a. producers are willing to supply more at a higher price.
b. producers are willing to supply more at each price.
c. producers are willing to supply less at a lower price.
d. producers are willing to supply less at each price.
ANSWER: b
26. Suppose the market price is currently above the equilibrium price. We would expect to find:
a. excess demand in the market.
b. price increasing to equilibrium.
c. quantity demanded greater than quantity supplied.
d. excess supply in the market.
ANSWER: d
27. If quantity supplied exceeds quantity demanded, we know that:
a. price will tend to fall.
b. excess supply exists.
c. sellers plan to sell more than buyers plan to buy.
d. All of the above.
ANSWER: d
28. If quantity demanded exceeds quantity supplied, we know that:
a. the market is in equilibrium.
b. market price is less than the equilibrium price.
c. market price exceeds the equilibrium price.
d. market price equals the equilibrium price.
ANSWER: b
29. If quantity supplied exceeds quantity demanded, we know that:
a. the market is in equilibrium.
b. market price is less than the equilibrium price.
c. market price exceeds the equilibrium price.
d. market price equals the equilibrium price.
ANSWER: c
30. Suppose there is an increase in demand. This would result in:
a. an increase in both the equilibrium price and quantity exchanged.
b. an increase in the equilibrium price and a decrease in the equilibrium quantity exchanged.
c. a decrease in the equilibrium price and an increase in the equilibrium quantity exchanged.
d. a decrease in both the equilibrium price and quantity exchanged.
ANSWER: a
31. An increase in supply will result in:
a. an increase in both equilibrium price and quantity.
b. a decrease in both equilibrium price and quantity.
c. a decrease in equilibrium price and an increase in equilibrium quantity.
d. an increase in equilibrium price and a decrease in equilibrium quantity.
ANSWER: c
32. A decrease in supply will result in:
a. an increase in both equilibrium price and quantity.
b. a decrease in both equilibrium price and quantity.
c. a decrease in equilibrium price and an increase in equilibrium quantity.
d. an increase in equilibrium price and a decrease in equilibrium quantity.
ANSWER: d
33. A decrease in demand for cheese will create:
a. an excess supply at the original equilibrium price.
b. an excess demand at the original equilibrium price.
c. an upward pressure on the price of cheese.
d. an equilibrium pressure on the price of cheese.
ANSWER: a
34. Farm prices tend to be unstable because:
a. the demand for some farm products is relatively sensitive to changes in price.
b. the demand for some farm products is relatively insensitive to changes in price.
c. the supply of some farm products is relatively sensitive to changes in price.
d. the supply of some farm products is relatively insensitive to changes in price.
ANSWER: b
35. The economic profits earned by farmers who first introduce a crop to the market may decline as
a result of:
a. competition.
b. falling marginal cost of production.
c. unstable farm incomes.
d. government price floors on agricultural products.
ANSWER: a
36. Government programs affecting agriculture often receive support because:
a. farmers face individual risk.
b. farmers face market risk.
c. farmers face intense competition.
d. all of the above.
ANSWER: d
37. The decline in farm population has been caused by:
a. the rapid decrease in output per farmer due to technological advances.
b. decreasing opportunity costs in the nonagricultural economy.
c. government regulations prohibiting entry into agriculture.
d. technological advances increasing the supply of farm output.
ANSWER: d
38. Marketing orders tend to:
a. increase competition and thereby lead to lower prices.
b. decrease competition and thereby lead to higher prices.
c. increase prices in secondary markets.
d. increase prices in both the primary and secondary markets.
ANSWER: b
39. Farmers can decrease risk by:
a. refusing to purchase crop insurance.
b. using more crop diversification than they have in the past.
c. growing crops that consumers need.
d. making consumers less sensitive to price changes in the agricultural sector.
ANSWER: b
40. Farmers can decrease risk by:
a. purchasing crop insurance.
b. specializing in production of one crop.
c. growing crops that consumers need.
d. making consumers less sensitive to price changes in the agricultural sector.
ANSWER: a
41. Which of the following is an example of farm policy that has been followed by the U.S.
government?
a. price supports.
b. target prices.
c. output restrictions.
d. All of the above.
ANSWER: d
42. A price floor is:
a. a maximum legal price set by government.
b. likely to result in excess demand.
c. a minimum legal price set by government.
d. a price less than the equilibrium price.
ANSWER: c
43. A deficiency payment is:
a. the difference between a price support and the market price multiplied by the quantity of
output sold.
b. the difference between a target price and the market price multiplied by the quantity of
output sold.
c. the difference between a price ceiling and the market price multiplied by the quantity of
output sold.
d. the difference between a maximum legal price and the market price multiplied by the
quantity of output sold.
ANSWER: b
44. A target price program will:
a. lower prices of the product for consumers.
b. increase tax collections because of government deficiency payments.
c. increase revenues for farmers.
d. All of the above.
ANSWER: d
45. The major difference between a price support program and a target price program is that:
a. price supports do not produce an excess supply.
b. target prices produce an excess demand.
c. target prices subsidize foreign buyers while price supports subsidize domestic buyers.
d. target prices subsidize domestic and foreign buyers.
ANSWER: d
46. Output constraints are designed to:
a. increase the supply of agricultural products so as to lower their price.
b. decrease the supply of agricultural products so as to lower the subsidy government must pay
to farmers.
c. let land lie fallow for a number of years so that it will be more productive when it is put back
into use.
d. decrease the demand for agricultural products.
ANSWER: b
47. Output constraints have not been a very successful means of controlling government payments to
farmers because:
a. farmers take their most productive land out of production.
b. farmers take their least productive land out of production.
c. farmers farm their land less intensively.
d. All of the above.
ANSWER: b
48. Jack lobbies his Congress person in an attempt to keep a price support program for bee-keepers
in tact. This is an example of:
a. economic rent seeking.
b. self-interested rent seeking.
c. political rent seeking.
d. legislative rent seeking.
ANSWER: c
49. Farm programs remain in place despite the fact they impose large costs upon society because:
a. the programs provide relatively large benefits to a small group that rewards the politician
with a great deal of support.
b. the benefits of the program are spread over a large number of people resulting in benefits to
the most deserving farmers.
c. the cost to each individual in society is so large that individuals will not discipline the
politician for the policy.
d. more people gain than lose, although total losses are greater than total benefits.
ANSWER: a
Critical Thinking Multiple-Choice Questions
50. Suppose the price of cheese increases. This will result in:
a. a decrease in demand.
b. a decrease in quantity demanded.
c. an increase in supply.
d. a decrease in quantity supplied.
ANSWER: b
51. An increase in the price of wheat will lead to:
a. a decrease in supply.
b. an increase in demand.
c. an increase in quantity demanded.
d. a decrease in quantity demanded.
ANSWER: d
52. Suppose the price of cheese decreases. The effect on consumers would be represented
graphically as:
a. a leftward shift in the demand curve.
b. a rightward shift in the demand curve.
c. a movement upward along the demand curve.
d. a movement downward along the demand curve.
ANSWER: d
53. The price of bagels increases from $1.00 per bagel to $1.25 per bagel. This would be represented
as:
a. a leftward shift in the demand curve.
b. a rightward shift in the demand curve.
c. a movement upward along the demand curve.
d. a movement downward along the demand curve.
ANSWER: c
54. Suppose a decrease in income causes the market demand curve for potatoes to shift to the right.
We can conclude that:
a. potatoes are a superior good.
b. potatoes are a normal good.
c. the demand for potatoes is not very sensitive to changes in price.
d. potatoes are an inferior good.
ANSWER: d
55. Suppose the price of Toyotas increases. This will result in:
a. a decrease in the demand for Fords.
b. an increase in the demand for Ford.
c. an increase in the quantity of Fords demanded.
d. an increase in the quantity of Toyotas demanded.
ANSWER: b
56. Jane loves peanut butter and jelly sandwiches. Suppose the price of peanut butter increases.
This will cause:
a. a decrease in Jane's demand for jelly.
b. an increase in Jane's demand for peanut butter.
c. an increase in Jane's quantity of jelly demanded.
d. an increase in Jane's demand for peanut butter.
ANSWER: a
57. Suppose reports in a medical journal show that the consumption of citrus fruit decreases the risk
of certain types of cancer. We would expect to find:
a. an increase in the quantity of citrus fruit demanded.
b. a decrease in the quantity of citrus fruit demanded.
c. an increase in the demand for citrus fruit.
d. a decrease in the demand for citrus fruit.
ANSWER: c
58. Suppose the price of eggs decreases. This will lead to:
a. a decrease in demand.
b. an increase in supply.
c. an increase in quantity supplied.
d. a decrease in quantity supplied.
ANSWER: d
59. An increase in the price of corn will cause:
a. an increase in demand.
b. an increase in supply.
c. an increase in quantity supplied.
d. a decrease in quantity supplied.
ANSWER: c
60. Suppose the price of pork bellies decreases. We would expect there to be:
a. a rightward shift of the supply curve.
b. an upward movement along the supply curve.
c. a downward movement along the supply curve.
d. a leftward shift of the supply curve.
ANSWER: c
61. Suppose the price of pizza increases. We would expect there to be:
a. a rightward shift of the supply curve.
b. an upward movement along the supply curve.
c. a downward movement along the supply curve.
d. a leftward shift of the supply curve.
ANSWER: b
62. Suppose the wages of farm workers increases. This is likely to cause:
a. the supply curve for lettuce to shift to the right.
b. an increase in the supply of lettuce.
c. an increase in the quantity of lettuce supplied.
d. the supply curve for lettuce to shift to the left.
ANSWER: d
63. A decrease in the price of tractors would likely:
a. cause the supply curve for agricultural products to shift to the right.
b. cause a movement upward along the supply curve for agricultural products.
c. cause the supply curve for agricultural products to shift to the left.
d. cause a movement downward along the supply curve for agricultural products.
ANSWER: a
64. Suppose there is an improvement in the technology associated with the production of milk. This
will result in:
a. a decrease in the supply of milk.
b. an increase the supply of milk.
c. a decrease in the demand for milk.
d. an increase in the demand for milk
ANSWER: b
Use the following diagram to answer questions 65 – 71.
Price per Unit (Dollars)
S
P3
P2
P1
D
0
Q
1
Q
2
Q3
Quantity per Week
65. The equilibrium price and quantity exchanged are:
a. P1 and Q1, respectively.
b. P2 and Q2, respectively.
c. P3 and Q3, respectively.
d. P1 and Q3, respectively.
ANSWER: b
66. When price is P1 the quantity supplied is:
a. Q1.
b. Q2.
c. Q3.
d. somewhere between Q2 and Q3.
ANSWER: a
67. When price is P1 the quantity demanded is:
a. Q1.
b. Q2.
c. Q3.
d. somewhere between Q2 and Q3.
ANSWER: c
68. When price is P3 the quantity demanded is:
a. Q1.
b. Q2.
c. Q3
d. somewhere between Q1 and Q3.
ANSWER: a
69. When price is P3 the quantity supplied is:
a. Q1.
b. Q2.
c. Q3
d. somewhere between Q1 and Q3.
ANSWER: c
70. When price is P3 there is:
a. an excess demand of Q2 - Q3.
b. an excess demand of Q1 - Q3.
c. an excess supply of Q1 - Q2.
d. an excess supply of Q1 - Q3.
ANSWER: d
71. When price is P1 there is:
a. an excess demand of Q2 - Q3.
b. an excess demand of Q1 - Q3.
c. an excess supply of Q1 - Q2.
d. an excess supply of Q1 - Q3.
ANSWER: b
72. When price is less than the equilibrium price:
a. excess supply exists.
b. there is a tendency for price to increase.
c. there is a tendency for price to decrease.
d. quantity supplied exceeds quantity demanded.
ANSWER: b
73. Suppose the market price of lettuce is currently $1.00 per head. The equilibrium price is $1.50.
We would expect:
a. excess demand to exist.
b. there to be a tendency for price to decrease.
c. quantity supplied to exceed quantity demanded.
d. excess supply to exist.
ANSWER: a
74. Suppose the market price of hamburger is $1.65 per pound. The equilibrium price of hamburger
is $1.50 per pound. We would expect:
a. a tendency for market price to fall.
b. a tendency for market price to increase.
c. a tendency for equilibrium price to increase.
d. excess demand to exist.
ANSWER: a
75. Suppose there is an increase in income in the community. If bagels are a normal good, this will
cause:
a. an increase in the equilibrium price and a decrease in the equilibrium quantity of bagels
exchanged.
b. an increase in both the equilibrium price and quantity of bagels exchanged.
c. a decrease in the equilibrium price and an increase in the equilibrium quantity of bagels
exchanged.
d. a decrease in both the equilibrium price and quantity of bagels exchanged.
ANSWER: b
76. Bread and butter are complements. Suppose there is an increase in the price of bread. We would
expect :
a. a decrease in both the equilibrium price and quantity of butter exchanged.
b. an increase in both the equilibrium price and quantity of butter exchanged.
c. an increase in the equilibrium price of butter and a decrease in the equilibrium quantity of
butter exchanged.
d. a decrease in the equilibrium price of butter and an increase in the equilibrium quantity of
butter exchanged.
ANSWER: a
77. Toyotas and Nissans are substitutes. Suppose there is a decrease in the price of Nissans. We
would expect:
a. a decrease in both the equilibrium price and quantity of Toyotas..
b. an increase in both the equilibrium price and quantity of Toyotas.
c. an increase in the equilibrium price of Toyotas and a decrease in the equilibrium quantity of
Toyotas.
d. a decrease in the equilibrium price of Toyotas and an increase in the equilibrium quantity of
Toyotas exchanged.
ANSWER: a
78. Suppose the technology of wool production improves. This will likely result in:
a. an increase in both the equilibrium price and quantity of wool exchanged.
b. a decrease in both the equilibrium price and quantity of wool exchanged.
c. a decrease in equilibrium price of and an increase in equilibrium quantity of wool
exchanged.
d. an increase in equilibrium price of and a decrease in equilibrium quantity of wool
exchanged.
ANSWER: c
79. Suppose there is an increase in the price of tractor fuel. We would expect:
a. an increase in equilibrium price and a decrease in equilibrium quantity of farm products
exchanged.
b. a decrease in both equilibrium price and quantity of farm products exchanged.
c. a decrease in equilibrium price and an increase in equilibrium quantity of farm products
exchanged.
d. an increase in both equilibrium price and quantity of farm products exchanged.
ANSWER: a
80. The wages paid to grape harvesters increases. We would expect:
a. an increase in both the equilibrium price and quantity of wine.
b. a decrease in both the equilibrium price and quantity of wine.
c. an increase in the equilibrium price of and a decrease in the equilibrium quantity of wine.
d. a decrease in the equilibrium price of and an increase in the equilibrium quantity of wine.
ANSWER: c
81. Suppose the supply of soy beans increases while the demand for soy beans decreases. This will
cause:
a. an increase in the equilibrium price, but the effect on quantity exchanged cannot be
determined.
b. a decrease in equilibrium quantity exchanged, but the effect on price cannot be determined.
c. a decrease in equilibrium price, but the effect on quantity exchanged cannot be determined.
d. an increase in equilibrium quantity exchanged, but the effect on price cannot be determined.
ANSWER: c
82. Suppose that the price of a substitute for wheat increases. At the same time, the cost of resources
used in producing wheat falls. The likely results in the wheat market would be:
a. a decrease in the equilibrium price of wheat, but the effect on the quantity of wheat
exchanged cannot be determined.
b. an increase in the equilibrium quantity of wheat exchanged, but the effect on price of wheat
cannot be determined.
c. an increase in the equilibrium price of wheat, but the effect on the quantity of wheat
exchanged cannot be determined.
d. an increase in both the equilibrium price and quantity of wheat exchanged.
ANSWER: b
Use the following diagram to answer questions 83 – 86.
Price per Unit (Dollars)
S1
S
2
P4
P3
P2
P1
D
2
D
1
0
Q1 Q 2 Q
3
Q
4
Quantity per Week
83. Suppose equilibrium price and quantity exchanged are initially P3 and Q1, respectively. If
Kelly's income increases and peaches are a normal good, then the new equilibrium price and
quantity of peaches exchanged will be:
a. P4 and Q2, respectively.
b. P3 and Q1, respectively.
c. P2 and Q4, respectively.
d. P1 and Q3, respectively.
ANSWER: a
84. Suppose equilibrium price and quantity exchanged are initially P2 and Q4, respectively. If the
wage paid to peach pickers increases, then the new equilibrium price and quantity of peaches
exchanged will be:
a. P1 and Q3, respectively.
b. P2 and Q4, respectively.
c. P4 and Q2, respectively.
d. P3 and Q1, respectively.
ANSWER: c
85. Suppose equilibrium price and quantity exchanged are initially P1 and Q3, respectively. If the
price of oranges, a substitute increases, then the new equilibrium price and quantity of peaches
exchanged will be:
a. P2 and Q4, respectively.
b. P3 and Q1, respectively.
c. P4 and Q2, respectively.
d. P3 and Q1, respectively.
ANSWER: a
86. Suppose equilibrium price and quantity exchanged are initially P3 and Q1, respectively. If there
is an advance in the technology used to harvest peaches, then the new equilibrium price and
quantity of peaches exchanged will be:
a. P1 and Q3, respectively.
b. P3 and Q1, respectively.
c. P4 and Q2, respectively.
d. P3 and Q3, respectively.
ANSWER: a
Use the following diagram to answer questions 87 – 89.
Price per Unit (Dollars)
S
2
S
1
2.00
1.00
D
7,000 15,000 20,000
Quantity per Week
87. If supply is given by S1 what is the total revenue?
a. $40,000.
b. $30,000.
c. $15,000.
d. $7,000.
ANSWER: c
88. Suppose supply decreases from S1 to S2. How much does total revenue change?
a. increases by $10,000.
b. decreases by $10,000.
c. increases by $1,000.
d. decreases by $1,000.
ANSWER: d
89. Suppose supply increases from S2 to S1. We know that total revenue will:
a. not change.
b. will increase.
c. will decrease.
d. will first increase and then decrease.
ANSWER: b
90. The supply of workers in the agricultural sector has declined significantly. At the same time
there has been a slight decline in demand for agricultural workers. The result of these two
changes has been to:
a. decrease the wages of workers in the agricultural sector.
b. increase the wages of workers in the agricultural sector.
c. have no impact on the wages of workers in the agricultural sector.
d. decrease the productivity or workers in the agricultural sector.
ANSWER: b
Use the following diagram to answer question 91.
Price
S1
S
2
P
1
P2
D
0
Q
1
Q
2
Q
3
Q
4
Quantity
91. Suppose an advance in technology causes supply to increase from S1 to S2. At price P1 there is:
a. an excess demand of Q3 - Q4.
b. an excess demand of Q2 - Q4.
c. an excess supply of Q3 - Q4.
d. an excess supply of Q2 - Q4.
ANSWER: d
92. Flooding in the Midwest causes much of the farm crop to be destroyed. As a result, the market
price of corn increases. We would expect:
a. farm income to remain unchanged.
b. farm income to decrease.
c. farm income to increase.
d. quantity demanded to increase because the good is more scarce.
ANSWER: c
93. An unusually good harvest causes the price of wheat to decrease. We would expect:
a. farm income to remain unchanged.
b. farm income to decrease.
c. farm income to increase.
d. quantity demanded to decrease because the good is more scarce.
ANSWER: b
94. As a result of price supports, we would expect to find:
a. an increase in the sale of agricultural products.
b. an excess supply of agricultural products.
c. a decrease in farm revenues.
d. a decrease in government expenditures.
ANSWER: b
95. Under a program of price supports taxpayers are:
a. better off because as consumers they receive more at a lower price.
b. better off because as consumers they receive less, but they pay a lower price.
c. worse off because they have to provide government with the money to buy the excess supply
that the subsidy produces.
d. worse off because an excess supply is created, thereby driving prices down.
ANSWER: c
Use the following diagram to answer questions 96 – 99.
Price per Unit (Dollars)
S
P3
P2
P1
D
0
Q1
Q2
Q3
Quantity per Week
96. Suppose there is a price support of P3. The quantity of output demanded by consumers will be:
a. Q1.
b. Q2.
c. Q3.
d. somewhere between Q1 and Q2.
ANSWER: a
97. Suppose there is a price support of P3. The quantity of output supplied by farmers will be:
a. Q1.
b. Q2.
c. Q3.
d. somewhere between Q1 and Q2.
ANSWER: c
98. If the target price is P3, the output produced must be sold in the market at a price of:
a. P1.
b. P2.
c. P3
d. less than P1.
ANSWER: a
99. With the target price, P3, there is potential excess supply of:
a. Q1 - Q2.
b. Q1 - Q3.
c. Q2 - Q3.
d. O - Q3.
ANSWER: b
Essay and Discussion Questions
1. Suppose a country produces two goods, oats and barley, which have similar production
processes. Suppose the government places a high price support on barley. After the
implementation of the barley price support program, health officials release the news that
the consumption of oats may lower cholesterol levels. Given the present policy and the new
health information, what is the likely effect in terms of the availability of oats? What is
likely to happen to this nation's imports of these two grains?
After the implementation of the price support, some farmers are likely to take their fields out of
oat production and devote them to barley production. As a result, the supply of oats will fall.
With the announcement that oat consumption may lower cholesterol levels, the demand for oats
is likely to rise. However, domestic farmers may be unwilling to respond to this increase in
demand because of the high price they can receive for their barley. If demand is not met by
domestic producers, then oats will have to be imported into the country.
2. "The price of chicken is 10 percent lower this year than last year, yet more chicken is being
sold. The law of supply must not apply to chicken." Explain why this statement is false.
The student should recognize that this could be caused by an increase in supply. This increase
means that producers are willing to sell more at each possible price. Therefore, it is possible for
price to decrease and the quantity sold to increase.
3. Suppose that instead of being concerned about the stability of farm income, government
feels that consumers are paying too high a price for food. As a result, they set a price
ceiling (a maximum legal price) on certain basic foodstuffs. Explain the likely results of
this policy.
The student should discuss the fact that the price ceiling may cause price to be less than the
equilibrium price. If this is the case then the market outcome will be an excess demand for these
basics. Consumers will want to buy more than farmers are willing to produce.
4. "If next year's harvest of corn fell by 25 percent due to drought, the total revenue earned
by corn producers would increase." Explain why this statement could be true.
The student should begin by discussing the idea that consumers are not very sensitive to a change
in the price of farm products. As a result, when price increases, there is an increase in total
revenue. A diagram could be used to show that although decreased consumption will cause a
drop in revenue, this will be more than offset by the increase in revenue caused by the increase in
price.
5. Regulations designed to enhance the profits earned by farmers may actually make them
worse off. Explain why this might occur.
The student can refer to the example of California orange growers given in the text. In the long
term, profits are not permanently increased. The increase in profits is not permanent due to the
fact that supply will increase, thereby decreasing profits. Also, buyers will turn to substitute
goods. This will decrease the quantity of the good the original producers are able to sell.
6. While government programs may not be necessary to reduce the risk faced by farmers,
these policies should be continued in an attempt to reduce farm poverty and protect the
rural life-style. Is this statement true or false? Defend your answer.
The student should bring out several facts. First, they should recognize that it is basically too late
to protect the rural life-style. The farm population, due to powerful economic and technological
forces, has dwindled to about 2 percent of the population. In addition, these programs do little to
reduce farm poverty. The majority of the benefits from these programs go to farms where
income is well above the poverty level. Family farms had average income of $56,000 per year.
This is also well above the national average. Thus, government programs do not have their basis
in farm poverty or in protecting the rural life-style.
7. Suppose that instead of being concerned about the stability of farm income, government
feels that consumers are paying too high a price for food. As a result, they set a price
ceiling (a maximum legal price) on certain basic foodstuffs. Explain the likely results of
this policy.
The student should discuss the fact that the price ceiling may cause price to be less than the
equilibrium price. If this is the case, then the market outcome will be an excess demand for these
basics. Consumers will want to buy more than framers are willing to produce.
Problems
Use the following diagram to answer questions 1 – 3.
Price
S1
S2
$3
A
$2
B
C
D
0
10,000
12,000
Quantity
1. If supply is S1, what is the total revenue earned by farmers?
If supply is S1, price is $3.00 per unit. At a price of $3.00 per unit, total revenue is $300 x 10,000
or $30,000. This is represented by areas A + B.
2. If supply is S2, what is the total revenue earned by farmers?
If supply is S2, price is $2.00 per unit. At a price of $2.00 per unit, total revenue is $2.00 x 12,000
or $24,000. This is represented by area B + C.
3. Suppose supply increases from S1 to S2. What happens to the total revenue earned by the
farmer?
If supply is S1, price is $3.00 per unit. At a price of $3.00 per unit, total revenue is $300 x 10,000
or $30,000. This is represented by areas A + B. If supply is S2, price is $2.00 per unit. At a price
of $2.00 per unit, total revenue is $2.00 x 12,000 or $24,000. This is represented by area B + C.
The increase in supply causes total revenue to fall by $6,000.
4. Suppose supply increases from S1 to S2. Identify the decrease in total revenue associated
with the price decrease. Identify the increase in total revenue associated with the increase
in quantity.
The decrease in total revenue due to the change in price is $1.00 x 10,000. This is represented by
area A. The increase in total revenue brought about by the increase in quantity is $2.00 x 2,000
or $4,000. This is represented by area C.