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Suppose the price elasticity of demand for farm products is inelastic

Economics Dec 17, 2020

Suppose the price elasticity of demand for farm products is inelastic. If the federal government wants to follow a policy of increasing income for farmers, what type of programs will the government enact?

Expert Solution

If the demand is inelastic the output does not respond to price aggressively. If the federal government was trying to increase the revenues of farmers the government could use numerous monetary and fiscal policy maneuvers to accomplish this task. One example of this is either a tax cut for the farmers or a subsidization of the farming industry. This increases supply, decreases price and increases output. Then in the government exercised their right to purchase a certain volume of the product this could shift the demand curve to the right. Even though this could be ambiguous if the shift in supply is proportionately smaller than the shift in demand the farmers make increased revenues.

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