AGEC 429 Problem Set #2

Name: UIN:Problem Set #2 (50 Points)AGEC 429Due Date: Tuesday, March 10, 2015In this assignment, you are asked to analyze and calculate the impact of various agricultural policy instruments on U.S.rice markets. In answering the questions, assume that you are a policy analyst working for the Secretary of Agriculture.The information you need to answer the questions is given in the table below. Note that quantities are given in 1,000hundredweight (cwt) and prices are given in $/cwt. (FYI: a hundredweight is 100 lbs but you don’t need to know thatto work this problem set.) You may not need all the information given in the table for every question. You must showyour work on one or more separate sheets and staple them to the problem set. NOTE: — = Not applicable.1. The Secretary of Agriculture is considering recommending a surplus purchase program with a support price of$14.00/cwt to the President but before he does he wants you to determine how much rice the government will haveto purchase to support price at that level and what the cost to the government will be. Fill in the blanks below withyour answers to the Secretary. Surplus to purchase = Cost to the government =2. Congressman Drinksalot is proposing a marketing loan program with the loan rate set at $14.00/cwt instead of agovernment surplus purchase program to support price at $14.00/cwt because he claims it will cost the governmentless than a surplus purchase program. The Secretary wants to know whether the Congressman is right and asks youto calculate the cost of the marketing loan program to the government. Fill in the blanks below with your answersto the Secretary. Cost of marketing loan program to the government = Who’s right – the Secretary or the Congressman?Rice Quantities and PricespriceelasticitiesEquilibriumBeforeProgramsSupply (million cwt) 0.28 189.886Demand (million cwt) -0.73 189.886Farm Price ($/cwt) — 10.00Consumer price ($/cwt) — 10.00Target Price ($/cwt) — NoneSupport Price ($/cwt) — NoneGovernment Cost (mil $) — None 3. Senator Cityslicker doesn’t like the Secretary’s government surplus purchase program proposal or CongressmanDrinksalot’s marketing loan program because she says both result in too much rice production and cost too much.She proposes a mandatory acreage reduction program to push the price of rice up to $14.00/cwt. The Secretaryasks you to calculate the total reduction in rice supply that would be required to push price to $14.00/cwt underSenator Cityslicker’s plan assuming a 4.5% slippage. He also asks you to analyze whether producers andconsumers will be better off, worse off, or the same with such a supply reduction program compared to agovernment surplus purchase program or a marketing loan program. Supply reduction required = In the table below, indicate whether producers and consumers will be better off, worse off, or the same with anacreage reduction program (ARP) compared to a government surplus purchase (GSP) program and a marketingloan program (MLP) by comparing producer surplus and consumer surplus in each case. Write “better”, “worse”,or “same” in each cell as appropriate. (Use “consumer and producer surplus” concepts to help you answer).Producers ConsumersGSP instead of an ARPMLP instead of an ARP4. The U.S. Rice Producers Association proposes a government funded advertising campaign to promote domesticrice consumption. They propose that the slogan for the rice promotion program should be “Try the sticky littlewhite stuff that most of the rest of the world eats because you’ll like it and besides it will help rice farmers.” (Timeto hire an advertising agency to come up with a better slogan!) Anyway, the Secretary wants to know how muchmore rice people will have to eat to get the price of rice up to $14.00/cwt. Fill in the blank below with your answerto the Secretary. Increased consumption required =5. Congresswoman Knowitall doesn’t like the policy recommendations of the Secretary, Congressman Drinksalot,Senator City Slicker, or the U.S. Rice Producers Association. She proposes a price loss coverage (PLC) paymentprogram with a reference price of $14.00/cwt and a NR loan rate set at a much lower $7.00/cwt safety net levelbecause she says this program will lower the price to consumers like Congressman Drinksalot’s proposed marketingloan program but will be cheaper than either the Secretary’s or Congressman Drinksalot’s programs. The Secretaryasks you to determine if she is right. What would Congresswoman Knowitall’s proposed program cost? Is Congress woman Knowit all right?- Does her program lower the price to consumers like the MLP?- Is her program cheaper than the Secretary’s and the Congressman’s programs?6. A bill for a government surplus purchase rice program as proposed by the Secretary of Agriculture makes its waythrough the Senate while a bill representing Congressman Drinksalot’s marketing loan rice program is passed bythe House of Representatives. The two bills are sent to a Conference Committee to craft a final policy. TheConference Committee announces that in addition to the programs proposed in the two bills, it is also considering aproposal by Senator Hayseed, a member of the Conference Committee, to combine the proposed marketing loanrice program with Congresswoman Knowitall’s price loss coverage (PLC) program with the reference price set at$14.00/cwt and the NR loan rate set at $9.00/cwt because the Senator says it would be cheaper than either thegovernment surplus purchase program or the marketing loan program by itself. The Secretary asks you if SenatorHayseed is correct. What would you answer and why? 7. If the Conference Committee selects the least costly program for the American taxpayer (of those they areconsidering), which one will they choose? __________________________________________________________________________________________8. If the loan rate in Senator Hayseed’s combined program was set at $7.00/cwt instead of $9.00/cwt, what effectwould that have on the Conference Committee’s decision about which program to select?