ARE/ECON 115A – Economics of Development

Subject: Economics    / General Economics
Question
ARE/ECON 115A
Economics of Development
Problem Set 3
You must limit your answer to all four questions (combined) on this Problem Set to no
more than 2 pages, single spaced, 12 font size! This means you need to be very
concise.
Most of the world’s agricultural producers are households, too. This assignment’s
objective is to try to answer the question: Which policy is best at improving the welfare
of rural households?

Please answer the following four questions:
1. Why are most of the world’s agricultural producers different from corporate farms
in California? 2. Using simple diagrams, show how each of the following, in theory, affects (i) the
supply of food for urban consumers, and (ii) the welfare of a representative
agricultural household:
a. An output price support
b. A fertilizer subsidy that does not change the output price
c. A cash transfer to agricultural households that does not change
output or input prices 3. Using the net benefit ratio method of Deaton, please tell us whether a 10%
increase in output price will increase or decrease the economic welfare of each of
the following three agricultural households, by how much, and why (be sure to
show your work):
a. Household A, which produces $100 of output of the crop but does not
consume any of it (selling the whole harvest on the market) and has a
total income of $200.
b. Household B, which produces $100 of output of the crop, consumes
$50 (selling the difference on the market), and has a total income of
$200.
1 Justin Kagin Winter 2017 c. Household C, which produces $100 of output of the crop and
consumes $150 (purchasing the difference on the market) and has a
total income of $200.
4. If you were the Minister of Agriculture, which one (or more) of the three
policies listed in Question 2 would be the most effective at increasing the
economic welfare of each of these three households, which would not, and why? 2