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Page 1
8. There are many wheat farmers, each of whom produces the same product. The wheat market can best be
classified as:
A) A competitive market. B) Monopolistic competition. C) Oligopoly. D) Monopoly.
Answer: A Type: Complex Understanding Page: 296
9. If agricultural markets are perfectly competitive, which of the following conditions is most likely to apply?
A) Interdependence of farms in selling their output.
B) The products of farmers in a market are homogeneous.
C) The individual farmers advertise heavily.
D) Collusion.
Answer: B Type: Basic Understanding Page: 296
10. If an individual farmer in a perfectly competitive agricultural market raises price above the market price,
the farmer will:
A) Not sell any product.
C) Earn greater total revenue.
B) See other farmers follow the price rise.
D) Earn greater total profit.
Answer: A Type: Basic Understanding Page: 296
11. In a perfectly competitive agricultural market with economic profits, farmers will:
A) Buy more farmland and expand production until profits are normal.
B) Buy more farmland and expand production until accounting profits are zero.
C) Exit until normal profits are zero.
D) Not enter or exit based on economic profits.
Answer: A Type: Basic Understanding Page: 296
Page 2
14. If an agricultural market is perfectly competitive, which of the following types of behavior might be
expected?
A) Price wars. B) Advertising. C) Frequent entry and exit. D) Collusion in restraint of trade.
Answer: C Type: Basic Understanding Page: 296
16. In perfectly competitive agricultural markets, farmers compete on the basis of:
A) Advertising only.
C) Improvements in productivity.
B) Price only.
D) Both price and nonprice competition.
Answer: C Type: Basic Understanding Page: 296
Page 3
20. The typically price-inelastic demand for agricultural products can be explained by:
A) Increasing opportunity costs.
C) Rapidly diminishing marginal utility.
B) Increasing marginal costs.
D) Slowly diminishing marginal utility.
Answer: C Type: Complex Understanding Page: 296
21. If the price elasticity of demand for food is low, an increase in supply due to an improvement in technology,
will result in:
A) Higher prices and a decrease in total revenue.
C) Lower prices and a decrease in total revenue.
B) Higher prices and an increase in total revenue. D) Lower prices and an increase in total revenue.
Answer: C Type: Definition Page: 296
22. Given the typical elasticity of demand for food, a poor harvest should, ceteris paribus, lead to:
A) Lower prices but higher total revenues.
C) Higher prices but lower total revenues.
B) Lower prices and lower total revenues.
D) Higher prices and higher total revenues.
Answer: D Type: Basic Understanding Page: 296
23. A bumper crop of wheat can lead to sharply lower market prices and a decline in earned farm income
primarily because:
A) The demand for wheat is price inelastic.
B) Foreign exports of wheat to the United States should increase.
C) The income elasticity of demand for wheat is negative.
D) The demand curve faced by individual wheat farmers is price-inelastic.
Answer: A Type: Basic Understanding Page: 296
Page 4
The income elasticity of food demand is low, which means that an increase in income results in:
An even greater increase in the quantity of food demanded.
A very slight increase in the quantity of food demanded.
Absolutely no increase in the quantity of food demanded.
A significant decrease in the quantity of food demanded.
26. Suppose European incomes increase by 5 percent per year and as a result, U.S. exports of farm goods to
Europe rise by 1 percent annually. The elasticity which can be computed from this information is the:
A) Cross-price elasticity of demand for U.S. farm exports with respect to European income.
B) Cross-price elasticity of demand for income with respect to exports.
C) Income elasticity of demand for U.S. farm exports.
D) Price elasticity of demand.
Answer: C Type: Complex Understanding Page: 296
27. Suppose European incomes increase annually by 6 percent per year. As a result, U.S. farm exports to
Europe rise by 2 percent annually. The numerical value of the income elasticity of demand for U.S. farm
exports is:
A) 0.33. B) -3.0. C) 12.0. D) 3.0.
Answer: A Type: Complex Understanding Page: 296
28. Suppose European incomes increase annually by 4 percent per year and as a result, U.S. farm exports to
Europe rise by 2 percent annually. The U.S. farm exports are:
A) Inferior goods. B) Normal goods. C) Price-elastic. D) Substitute goods.
Answer: B Type: Analytical Page: 296
29. Suppose a bumper crop results in a 20 percent increase in output and sales, while the price elasticity of
demand for wheat is about 0.4. Ceteris paribus, prices should:
A) Rise by 8 percent. B) Fall by 8 percent. C) Rise by 50 percent. D) Fall by 50 percent.
Answer: D Type: Analytical Page: 296
Page 5
31. If the price of corn falls by 25 percent on world markets, causing American corn consumption to increase
by 5 percent, ceteris paribus, the price elasticity of demand for corn in the United States would be:
A) 0.20. B) 0.75. C) 1.25. D) 0.30.
Answer: A Type: Analytical Page: 296
32. Suppose American corn farmers plant a higher-yielding variety of corn. As a result of this investment,
output increases by 2 percent. If the price elasticity of demand for corn is 0.25, market prices will:
A) Increase by 8 percent.
C) Decrease by 0.50 percent.
B) Decrease by 8 percent.
D) Decrease by 2 percent.
Answer: B Type: Complex Understanding Page: 296
33. If the price elasticity of demand for food is elastic, a successful effort by farmers to increase productivity,
ceteris paribus, will result in:
A) Higher total revenues.
C) Higher prices for food crops.
B) Lower total revenues.
D) Higher demand for food corps.
Answer: A Type: Complex Understanding Page: 296
34. If government support for U.S. farmers is completely eliminated, which of the following scenarios is most
likely to be true in the long run?
A) Economic profits would be normal and output would be at the minimum ATC.
B) Excess capacity would exist due to product differentiation.
C) Economic losses would exist.
D) There would be a larger number of farmers because of greater ease of entry.
Answer: A Type: Complex Understanding Page: 296
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37. Wide price swings in farm products are the result of:
A) Supply shifts and the relatively inelastic demand for food.
B) Supply shifts and the relatively elastic demand for food.
C) The high income elasticity of food demand.
D) Demand shifts and the relatively elastic supply of food.
Answer: A Type: Basic Understanding Page: 297
38. Short-term price swings for farm products are partially the result of:
A) Producers acting collectively to bid up prices.
B) The high income elasticity of food demand.
C) The high price elasticity of food demand.
D) Time lags between the production decision and the resultant harvest.
Answer: D Type: Basic Understanding Page: 297
40. During the period from 1910-1919, demand for U.S. farm goods:
A) Increased because of the expanded foreign demand.
B) Increased because of the improved farm technology.
C) Decreased because of the Great Depression.
D) Decreased because of restrictions on international trade.
Answer: A Type: Basic Understanding Page: 299
41. Which of the following was a problem for the U.S. agricultural market during the 1920s?
A) Decreased demand for farm products by the European market because World War I had ended.
B) Decreased demand for farm exports because of increased restrictions on international trade.
C) Increased supply of farm products because of improved technology.
D) All of the above.
Answer: D Type: Basic Understanding Page: 299
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43. Farm price-support programs most often take the form of:
A) Price ceilings above the equilibrium price.
C) Price floors above the equilibrium price.
B) Price ceilings below the equilibrium price.
D) Price floors below the equilibrium price.
Answer: C Type: Complex Understanding Page: 300
45. The result of maintaining above-equilibrium market prices for agricultural products is:
A) Shortages of agricultural products.
B) More resources devoted to agriculture than is optimal.
C) Redistribution of income from farmers to consumers.
D) All of the above.
Answer: B Type: Basic Understanding Page: 300
Page 8
49. When effective price floors are set for an agricultural market, the quantity demanded will be:
A) Less than the equilibrium quantity, and price will be greater than the equilibrium price.
B) Less than the equilibrium quantity, and price will be less than the equilibrium price.
C) Greater than the equilibrium quantity, and price will be greater than the equilibrium price.
D) Greater than the equilibrium quantity, and price will be less than the equilibrium price.
Answer: A Type: Basic Understanding Page: 300
50. When effective price floors are set to stabilize prices in an agricultural market, the quantity supplied will
be:
A) Less than the equilibrium quantity, and price will be less than the equilibrium price.
B) Less than the equilibrium quantity, and price will be greater than the equilibrium price.
C) Greater than the equilibrium quantity, and price will be less than the equilibrium price.
D) Greater than the equilibrium quantity, and price will be greater than the equilibrium price.
Answer: D Type: Basic Understanding Page: 300
51. Which of the following would result from a price-support program when the support price is set above the
equilibrium price, ceteris paribus?
A) Output would decline.
C) The consumption of the product would rise.
B) The price paid by consumers would rise.
D) All of the above.
Answer: B Type: Basic Understanding Page: 300
53. The relationship between farm and non-farm prices which existed during the period 1910 to 1914 is known
as:
A) The payment-in-kind program.
C) The target price.
B) The farm parity price.
D) Price supports.
Answer: B Type: Basic Understanding Page: 300
Page 9
55. If the U.S. wanted tobacco farmers to produce the socially optimal output level, the best policy to pursue
would be to:
A) Continue the subsidy programs now in existence.
B) Allow the market to determine output levels without government intervention.
C) Allow the market to determine output levels with efficient government intervention to adjust for
externalities.
D) Raise support prices to 1901-1914 parity levels.
Answer: C Type: Complex Understanding Page: 300
56. Supply restrictions in the farming industry occur in the form of:
A) Price supports. B) Deficiency payments. C) Acreage set-asides.
57. Supply restrictions in the farming industry occur in the form of:
A) Import quotas. B) Price supports. C) Government stockpiles.
D) Production subsidies.
60. Which of the following agricultural programs reduces agricultural output, rather than increasing it?
A) Direct income-support programs.
C) Marketing orders.
B) Farm cost subsidies.
D) Export sales.
Answer: C Type: Complex Understanding Page: 300
Page 10
62. If the market price of wheat is below the government's loan rate:
A) The Commodity Credit Corporation lends the farmer an amount equal to the loan rate times the
farmer's wheat output and takes the farmer's wheat crop as collateral.
B) The wheat farmer defaults on the loan but keeps the crop; the CCC keeps the money.
C) The wheat farmer, in effect, buys the crop from the CCC.
D) All of the above.
Answer: A Type: Basic Understanding Page: 301
63. Whenever market prices are below Commodity Credit Corporation loan rates:
A) There are restrictions on supply.
B) Export sales decrease.
C) The government takes surplus crops as collateral.
D) All of the above.
Answer: C Type: Basic Understanding Page: 301
65. The market surplus induced by price supports can be eliminated through:
A) Government purchases. B) Export sales. C) Restrictions on supply. D) All of the above.
Answer: D Type: Basic Understanding Page: 301
66. Which of the following can be used by the government to eliminate surplus food supplies?
A) The purchase of surplus food.
C) Restrictions on supply.
B) Encouragement of export sales.
D) All of the above.
Answer: D Type: Basic Understanding Page: 301
67. Which of the following government actions will result in a decrease in surplus food supplies:
A) An increase in the loan rate.
B) A decrease in acreage set-asides.
C) Subsidized advertising of U.S. farm products in foreign markets.
D) A decrease in the stockpiling of surplus food.
Answer: C Type: Basic Understanding Page: 302
Page 11
69. Irrigation water delivered by federally funded reclamation projects is classified as:
A) A farm cost subsidy.
C) Parity prices.
B) An income-support program.
D) A price-support policy.
Answer: A Type: Complex Understanding Page: 302
70. Government subsidies on the purchase of irrigation water by farmers result in:
A) Higher fixed costs to farmers.
B) Lower costs of production and increased output.
C) Decreased output because variable costs are higher.
D) No change to fixed or variable costs.
Answer: B Type: Basic Understanding Page: 302
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D) Deficiency payments.
78. Farming profits between 1979 and 1983 were affected by:
A) Declining land values. B) Declining exports. C) Rising interest rates.
79. The profit of farmers between 1979 and 1983 fell because of:
A) Rising land values. B) Increasing exports. C) Rising fuel costs.
Page 13
85. An increase in the value of the U.S. dollar internationally, ceteris paribus, would result in:
A) Higher revenues for U.S. farmers.
B) An increase in the dollar value of U.S. farmland.
C) Lower revenues for U.S. farmers.
D) An increase in the domestic prices of U.S. farm products.
Answer: C Type: Complex Understanding Page: 305
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Page 15
93. The intent of the 1996 Freedom to Farm Act was to:
A) Make farmers more dependent on market forces.
B) Improve allocative efficiency.
C) Reduce prices to consumers.
D) All of the above.
Answer: D Type: Basic Understanding Page: 306
94. The primary intent of the 1996 Freedom to Farm Act was to:
A) Make farmers more dependent on market forces.
B) Increase prices paid to farmers.
C) Increase acreage set-asides.
D) All of the above.
Answer: A Type: Basic Understanding Page: 306
95. What impact did the "Asian crisis" have on U.S. agriculture beginning in 1998?
A) Decreased farm exports to Asia.
B) Decreased grain prices.
C) Decreased employment in the U.S. farm equipment industry.
D) All of the above.
Answer: D Type: Basic Understanding Page: 306
96. The principle cause of a third farm depression beginning in 1998 was:
A) A crop failure in 1998.
C) The Asian economic crisis.
B) A decrease in grain prices.
D) All of the above.
Answer: C Type: Basic Understanding Page: 306
97. The response of Congress to the third farm depression beginning in 1998 was to:
A) Further deregulate the farming industry.
B) Set quotas on agricultural imports.
C) Increase federal aid to farmers, counter to the intent of the 1996 Farm Act.
D) Reinstate target prices and deficiency payments.
Answer: C Type: Basic Understanding Page: 306
Page 16
100. The Farm Security Act of 2001 increased subsidies to farmers which is likely to:
A) Decrease the farm surpluses.
C) Lower the interest rates farmers pay.
B) Increase the farm surpluses.
D) Decrease the CCC loan rates.
Answer: B Type: Basic Understanding Page: 307
S u p p ly C u rv e
(rig h tw a rd )
D e m a n d C u rv e
(le ftw a rd )
Q u a n tity o f W h e a t
(a )
Q u a n tity o f W h e a t
(b )
Q u a n tity o f W h e a t
(c )
Page 17
D e m a n d C u rv e
(rig h tw a rd )
Q u a n tity o f W h e a t
(d )
A crop failure in Russia results in large exports of wheat from the United States. (See Figure 14.1.)
B) b. C) c. D) d.
103. Interest rates fall, which reduces debt-service requirements of farmers. (See Figure 14.1.)
A) a. B) b. C) c. D) d.
Answer: B Type: Complex Understanding Page: 300
104. Transport costs for farm products decrease. (See Figure 14.1.)
A) a. B) b. C) c. D) d.
Answer: B Type: Complex Understanding Page: 300
105. Immigration restrictions lead to higher labor costs. (See Figure 14.1.)
A) a. B) b. C) c. D) d.
Answer: A Type: Complex Understanding Page: 300
106. The federal government decides to no longer purchase wheat from farmers. (See Figure 14.1.)
A) a. B) b. C) c. D) d.
Answer: C Type: Complex Understanding Page: 300
107. The dollar falls in value in the foreign exchange markets. (See Figure 14.1.)
A) a. B) b. C) c. D) d.
Answer: D Type: Complex Understanding Page: 300
108. The dollar increases in value in the foreign exchange markets. (See Figure 14.1.)
A) a. B) b. C) c. D) d.
Answer: C Type: Complex Understanding Page: 300
109. The federal government restricts the amount of agricultural products that can be imported. (See Figure
14.1.)
A) a. B) b. C) c. D) d.
Answer: A Type: Complex Understanding Page: 300
110. The federal government allows increased imports of agricultural products. (See Figure 14.1.)
A) a. B) b. C) c. D) d.
Answer: B Type: Complex Understanding Page: 300
Page 18
111. The European Union tightens restrictions on the agricultural products that can be imported from the United
States. (See Figure 14.1.)
A) a. B) b. C) c. D) d.
Answer: C Type: Complex Understanding Page: 300
112. The European Union reduces restrictions on the agricultural products that can be imported from the United
States. (See Figure 14.1.)
A) a. B) b. C) c. D) d.
Answer: D Type: Complex Understanding Page: 300
114. If the government wished to institute a set-aside program to support the price at P 1 rather than P2 in Figure
14.2, by how much would market output be reduced?
A) Q5 to Q1. B) Q3 to Q1. C) Q3 to Q2. D) Q4 to Q2.
Answer: C Type: Analytical Page: 300
Page 19
M C
ATC
AV C
P ric e
F lo o r
M R
Q U A N T IT Y
116. Refer to Figure 14.3 for Farmer Brown with a price floor set above the market price. Assume the price
support is located at the minimum point on the farmer's ATC curve. If this support is eliminated, Farmer
Brown may:
A) Leave the market.
B) Reduce costs by investing in new technology.
C) Shutdown in the short run if price is below the minimum AVC.
D) All of the above.
Answer: D Type: Complex Understanding Page: 300
117. Refer to Figure 14.3 for Farmer Brown with a price floor set above the market price. Assume the price
support is located at the minimum point on the farmer's ATC curve. If this support is eliminated:
A) Some farmers will leave the industry.
B) Farmers will begin to lose money as the price returns to equilibrium.
C) Fewer resources will be allocated to this market.
D) All of the above.
Answer: D Type: Complex Understanding Page: 300
Page 20
P R IC E
S u p p ly
P2
P1
D em and
Q
Q U A N T IT Y
118. Refer to Figure 14.4 for an agricultural market with equilibrium price P1 and support price P2. At the
support price of P2, a surplus exists equal to:
A) Q3. B) Q3 - Q2. C) Q3 - Q1. D) Q1 - Q2.
Answer: B Type: Complex Understanding Page: 300
119. In Figure 14.4, how much will the output change, compared to the equilibrium output, when a support price
of P2 is imposed?
A) Decrease by Q3 minus Q2.
C) Increase by Q3 minus Q2.
B) Decrease by Q1 minus Q2.
D) Increase by Q3 minus Q1.
Answer: D Type: Analytical Page: 300
Page 21
M C
P2
M R 2
P1
M R 1
Q 1
Q 2
Q U A N T IT Y
120. Refer to Figure 14.5 for Farmer Betty facing an equilibrium price of P1 and a support price of P2. At the
support price of P2 :
A) Farmer Betty is using resources that could be producing more highly valued goods.
B) Farmer Betty needs more resources to produce the socially optimal level of output.
C) Farmer Betty, and other farmers like her, will be forced from this market because of the surpluses being
created.
D) A shortage is being created.
Answer: A Type: Complex Understanding Page: 300
P R IC E
CCC
lo a n
ra te
P1
D
Q
Q U A N T IT Y
Page 22
122. Refer to Figure 14.6 for a cotton market with an equilibrium price of P1 and a CCC loan rate set above P1.
If the CCC loan rate is increased, the:
A) Surplus in the market will become larger.
C) Shortage in the market will become larger.
B) Surplus in the market will become smaller.
D) Shortage in the market will become smaller.
Answer: A Type: Complex Understanding Page: 300
The following multiple-choice questions require critical thinking about In the News and World View articles that
appeared in the text.
123. One World View article reports about the EU " the subsidy for every cow is greater than the personal
income of half the people in the world." Which of the following programs is involved?
A) Price supports.
C) Direct income support.
B) A reduction of production costs.
D) All of the above.
Answer: A Type: Complex Understanding Page: 303
124. One World View article reports "Most industrialized countries go to even greater lengths [than the United
States] to protect domestic agriculture." Which government program would protect farm products?
A) Elimination of trade barriers for farm goods.
C) A laissez-faire policy.
B) Farm subsidies.
D) All of the above.
Answer: B Type: Complex Understanding Page: 303
125. One World View article reports "The European Union (EU) imposes high tariffs on imported food "
Which of the following farm-support programs is involved?
A) Stabilizing prices.
C) Providing direct income support.
B) Reducing production costs.
D) All of the above.
Answer: A Type: Complex Understanding Page: 303
126. One World View article reports " France, Germany, and Switzerland all shield their farmers from
international competition while subsidizing their exports." Which of the following shifts for agricultural
products in international markets shows the effect of export subsidies?
A) The supply curve shifts to the right.
C) The demand curve shifts to the right.
B) The supply curve shifts to the left.
D) The demand curve shifts to the left.
Answer: A Type: Complex Understanding Page: 303
Page 23
DESTABILIZING FORCES
T
F 127. Because there are 2 million farms in the U.S., individual farmers have some market power.
Answer: False Type: Basic Understanding Page: 296
F 128. Individual farmers behave like perfect competitors but are still able to earn economic profits in the
long run.
Answer: False Type: Basic Understanding Page: 296
F 129. The farming industry experiences high barriers to entry because of the large amounts of acreage
and expensive equipment that are needed.
Answer: False Type: Basic Understanding Page: 296
F 131. Changes in weather cause abrupt shifts in the food supply curve which result in price fluctuations.
Answer: True Type: Basic Understanding Page: 297
F 132. Given a change in food prices, farmers are typically able to respond rapidly with a change in
output.
Answer: False Type: Basic Understanding Page: 297
F 134. During the early 1900s, U.S. farm goods were heavily subsidized by the government.
Answer: False Type: Basic Understanding Page: 299
F 135. Demand for U.S. farm products was high during World War I.
Answer: True Type: Basic Understanding Page: 299
Page 24
F 136. U.S. farm exports increased during the 1920s because of reduced trade barriers.
Answer: False Type: Basic Understanding Page: 299
F 137. Farm-support programs most often take the form of price floors, which cause excess demand.
Answer: False Type: Basic Understanding Page: 300
F 138. Acreage set-asides shift the food supply curve to the right and decrease farm prices.
Answer: False Type: Basic Understanding Page: 300
F 139. An embargo on U.S. agricultural crops decreases the demand for U.S. agricultural goods abroad.
Answer: True Type: Basic Understanding Page: 300
F 140. The loan rate is a low interest rate at which farmers may borrow from the federal government on a
short-term basis.
Answer: False Type: Basic Understanding Page: 301
F 141. The effect of Commodity Credit Corporation loan programs is to alter the quantity demanded of
farm products as well as to increase the quantity supplied.
Answer: True Type: Basic Understanding Page: 303
F 142. If parity prices are "fair" they will not cause a market surplus.
Answer: False Type: Basic Understanding Page: 303
F 143. When angry farmers cried "parity not charity" they wanted higher price supports rather than a
direct subsidy.
Answer: True Type: Basic Understanding Page: 303
F 144. An increase in fuel prices resulted in higher costs in agriculture during the 1980s.
Answer: True Type: Basic Understanding Page: 304
Page 25
F 146. A weaker value of the U.S. dollar strengthens exports of American agricultural crops.
Answer: True Type: Basic Understanding Page: 305
F 147. The Farm Security Act of 1985 included a gradual reduction in government support prices.
Answer: True Type: Basic Understanding Page: 305
F 148. The 1996 Freedom to farm Act actually increased the level of government assistance to farmers.
Answer: False Type: Basic Understanding Page: 306
F 149. In the late 1990s, the Asian crisis reduced the demand for U.S. farm products which weakened
farm prices.
Answer: True Type: Basic Understanding Page: 306
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