In a rural area on the Andes it's planting season. Farmers must decide if they want to grow yucca this year. They believe that at harvest season they will face a demand for yucca Qd = 500 - 100P where the price is in dollars per bushel and quantity is in thousands of bushels.

Once the land has been prepared and fertilized and the yucca has been planted, the short run supply of yucca of a typical farmer is qs = P-1. Since there are one hundred farmers in the area, every farmer expects supply at harvest season to be Qs = 100P - 100.

a) What price do farmers expect to receive on a bushel of yucca at harvest season?

Suppose that, once the cost of ploughing and fertilizing the land is factored in, the break-even price of yucca is $3.40.

b) Do farmers plant yucca this year?

c) Suppose the price of yucca was $3.50, would the market for yucca create some consumer surplus?

The market for yucca faces a coordination problem. The market is viable only if the market price is $3.40 or higher but at that price there is not enough demand to support one hundred farmers.

Suppose the local government uses income taxes to finance a deficiency payment program of the kind we discussed in class on Tuesday.

On each bushel of yucca sold, the program would pay farmers the difference between $3.50 (target price) and the market price.

d) If the program is enacted, do farmers decide to grow yucca? How much yucca do they grow?

e) If the program is enacted, what is the market price of yucca at market season? How much does the program cost to the local government? f) Given the break-even price of producing yucca is $3.40, how much profit does the market for yucca create if the program is enacted?

g) How much consumer surplus does the market for yucca create in this case?

h) Given that without the program there wouldn't be a market for yucca, does the program enhances or reduces efficiency?