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OG 10th edition Q 149

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OG 10th edition Q 149

by Nidhs » Tue Jan 29, 2008 8:01 pm
The cotton farms of Country Q became so productive that the market could not absorb all that they
produced. Consequently, cotton prices fell. The government tried to boost cotton prices by offering farmers who
took 25 percent of their cotton acreage out of production direct support payments up to a specified maximum per
farm.
The government’s program, if successful, will not be a net burden on the budget. Which of the following, if
true, is the best basis for an explanation of how this could be so?
(A) Depressed cotton prices meant operating losses for cotton farms, and the government lost revenue from
taxes on farm profits.
(B) Cotton production in several counties other than Q declined slightly the year that the support-payment
program went into effect in Q.
(C) The first year that the support-payment program was in effect, cotton acreage in Q was 5% below its level
in the base year for the program.
(D) The specified maximum per farm meant that for very large cotton farms the support payments were less
per acre for those acres that were withdrawn from production than they were for smaller farms.
(E) Farmers who wished to qualify for support payments could not use the cotton acreage that was withdrawn
from production to grow any other crop.

The correct ans is A and I chose D. Can someone please explain to me why I am wrong? If the govt charges an x amt to all farms irrespective of their size.....this would save money rather then if govt alloted money based on size.
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by simplyjat » Tue Jan 29, 2008 9:13 pm
The net burden on the government is specified by ( expenditure - income ). We need to select a statement that says both expenditure and income increased proportionally, leaving the net burden same.

D states that the change is expenditure would be less, but there would be a change certainly. The expenditure change is already stated in the argument.

A states that income will change as well, and thus may result in no change in net burden
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by lunarpower » Fri Mar 07, 2008 2:21 am
simplyjat wrote:The net burden on the government is specified by ( expenditure - income ). We need to select a statement that says both expenditure and income increased proportionally, leaving the net burden same.

D states that the change is expenditure would be less, but there would be a change certainly. The expenditure change is already stated in the argument.

A states that income will change as well, and thus may result in no change in net burden
correct.

more concisely:
choice d doesn't list any way in which the government gets money - or prevents losses, which is equivalent - with its scheme, whereas choice a does.
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Please

by enniguy » Sat Oct 31, 2009 6:22 am
I am just not getting this CR. Could someone please help me understand?

As I understand, Govt is paying for those farmers who will opt to take 25% of their farmland out of production. So, if Govt. pays up for these farmers it's a financial burden for the Govt. Option A specifies that Govt. will lose more money as it will miss the taxes on the revenues from these 25% farmland.
So, effectively, it's a double loss.

What am I getting wrong?
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by Testluv » Sat Oct 31, 2009 6:08 pm
I am just not getting this CR. Could someone please help me understand?

As I understand, Govt is paying for those farmers who will opt to take 25% of their farmland out of production. So, if Govt. pays up for these farmers it's a financial burden for the Govt. Option A specifies that Govt. will lose more money as it will miss the taxes on the revenues from these 25% farmland.
So, effectively, it's a double loss.

What am I getting wrong?
The cotton farms of Country Q became so productive that the market could not absorb all that they
produced. Consequently, cotton prices fell. The government tried to boost cotton prices by offering farmers who
took 25 percent of their cotton acreage out of production direct support payments up to a specified maximum per
farm.
The government's program, if successful, will not be a net burden on the budget. Which of the following, if
true, is the best basis for an explanation of how this could be so?
(A) Depressed cotton prices meant operating losses for cotton farms, and the government lost revenue from
taxes on farm profits.
(B) Cotton production in several counties other than Q declined slightly the year that the support-payment
program went into effect in Q.
(C) The first year that the support-payment program was in effect, cotton acreage in Q was 5% below its level
in the base year for the program.
(D) The specified maximum per farm meant that for very large cotton farms the support payments were less
per acre for those acres that were withdrawn from production than they were for smaller farms.
(E) Farmers who wished to qualify for support payments could not use the cotton acreage that was withdrawn
from production to grow any other crop.

Hi enniguy,

the government is givng money to the farmers in exchange for their producing less cotton. This will only be worth it for the government if excess cotton (due to hyperproduction) would have meant a budgetary deficit for the government. If the excess cotton (leading to depressed prices) would not have hurt the federal budget, then the feds are just wasting money by giving it to the farmers.
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Dint get it

by enniguy » Sun Nov 01, 2009 12:13 am
Testluv wrote: Hi enniguy,

the government is givng money to the farmers in exchange for their producing less cotton. This will only be worth it for the government if excess cotton (due to hyperproduction) would have meant a budgetary deficit for the government. If the excess cotton (leading to depressed prices) would not have hurt the federal budget, then the feds are just wasting money by giving it to the farmers.
Oh Ok. I think I got it now. So, the depression in the cotton prices would hurt govt's tax revenues. That will be a loss anyways. Hence, by paying some of that amount to the farmers, govt is ensuring that prices remain high, thereby leading to higher taxes. Hence, govt. can afford to pay the farmers without any loss. Am I right?
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by Testluv » Sun Nov 01, 2009 12:44 am
Hi enniguy,

sounds like you're close but just a bit off.

Let's consider the stimulus a little bit.

The first two sentences tell us the farmers made so much cotton that the prices dropped. The third sentence tells us that the government tried to boost prices by giving money to some farmers in exchange for their making less cotton. Apparently, the government was concerned.

But notice the stimulus did not establish that the government was actually hurt by these diminished prices. What if (for some reason) lower cotton prices would not have harmed the government? Then, they would have given away free money for no reason.

The question is asking you to find a fact that would ensure that the government's plan was not at a loss. What we need is a choice that tells us that without their money-giving plan, the government would have lost money because of the diminished cotton prices. Choice A gives us a way that the lower cotton prices would harm the government: it would not be collecting as much tax from the farmers.
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by aagar2003 » Sun Aug 07, 2011 3:09 am
Testluv wrote: The question is asking you to find a fact that would ensure that the government's plan was not at a loss. What we need is a choice that tells us that without their money-giving plan, the government would have lost money because of the diminished cotton prices. Choice A gives us a way that the lower cotton prices would harm the government: it would not be collecting as much tax from the farmers.
if the net burden on budget = expenditure - income
govt is at loss of income because of decreases prices
further they are spending to keep the prices in place (expenditure)

I fail to understand how is net burden reduced using any logic
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by XLogic » Sun Aug 07, 2011 11:05 am
The government is looking for optimal price and quantity for cotton farmers
Why? Optimal P and Q maximizes cotton farmers' profits (holding cost constant)
Profit = Revenue - Cost

Optimal profit maximizes Government tax revenue (govt tax on profits)
Tax Revenue = X% of Profit

At low prices, cotton farmers make no profit, therefore the govt can't raise revenue from taxing cotton farmers profits. Therefore, the govt has a vested interest in cotton farmers' profit making ability; which, based on the text, is mostly influenced by higher prices.

if the program is successful, then the increased tax revenue (from profits) will cancel out expenditures due to govt subsidies.

Net burden on govt budget = tax revenue - subsidies
Last edited by XLogic on Sun Aug 07, 2011 11:25 am, edited 2 times in total.
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by pradeepkaushal9518 » Sun Aug 07, 2011 11:16 am
nidhs i will explain u in very simple manner

cotton farms should make profits. government get profit taxes from these farms when they make profits. so the cotton farms should make profit.

now if production is high then prices fall this is very common practice in market. more supply less demand prices fall. so now government in order to keep demand more they absorb some percentage of cotton so that demand and supply will match. now prices wont fall and farms make profits with high price of cotton. more profit of farms then more tax collection from them and govt earn more.

uffff i hope it is clear now. ans is A
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by dhonu121 » Wed May 16, 2012 9:00 am
Thanks to all those who commented here.
I have the following argument to contest between A and D. While I see how A is correct, but with the following logic, I am not able to rule out D as clearly as I should. Please help.
Now the stimulus says,
"The government's program, if successful, will not be a net burden on the budget. Which of the following, if true, is the best basis for an explanation of how this could be so?"

D says that the proposal the goverment has made is done keeping in mind that bigger farms whose 25% is more than smaller farms' 25% should get money upto a certain maximum. This shows that the goverment has already set a limit keeping in mind that this policy does not causes a net burden on it.

How do we counter this argument ?a
If you've liked my post, let me know by pressing the thanks button.
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