Question: In 1983 the Reagan administration introduced a new agricultural program called the Payment-in-Kind [PIK] Program. To see how the program works let us consider a simplified version - BASE YOUR ANSWERS ENTIRELY ON THE OUTLINE BELOW AND NOT ON THE ACTUAL HISTORICAL PROGRAM.

Assume that the free market price of wheat is $4 per bushel and the free market supply is 20 million bushels.

Suppose the government wishes to lower the supply of wheat by 25% by paying farmers to withdraw land from production. However, the payment is made in wheat rather than in dollars [hence the name of the program]. The wheat comes from the government reserves accumulated from previous price support programs. The amount of wheat paid is equal to the amount that could have been harvested on the land withdrawn from production. Farmers are free to sell the wheat on the market.

(a) How much wheat is now produced by the farmers? 1 point

(b) How much wheat is indirectly supplied to the market by the government? 1 point

(c) Will the market price change from free market price of $4? Why or why not? 1.5 point

(d) Do farmers gain or lose from the program? How? 1.5 points

(e) Does the government save money? How? 1.5 points

(f) Why was the program very short lived [that is, what are the problems with it]? 3.5 points