Multiple choice

Directions: For this question, select the best of the answer choices given.

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?

  1. Depressed cotton prices meant operating losses for cotton farms, and the government lost revenue from taxes on farm profits.

  2. Cotton production in several countries other than Q declined slightly the year that the support-payment program went into effect in Q.

  3. 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.

  4. 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per farm meant that for very large cotton farms the support payments were less per acre for those acres that were withdrawn from production than they were for smaller farms.

  5. Farmers who wished to qualify for support payments could not use the cotton acreage that was withdrawn from production to grow any other crop.
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

The puzzle is how paying farmers subsidies won't burden the budget. Option A explains that depressed cotton prices were causing farm losses, which reduced tax revenue from farm profits. By raising cotton prices, the program restores farm profitability, and the increased tax revenue from profitable farms offsets the subsidy payments. The government effectively trades direct subsidy costs for recovered tax revenue, making the program budget-neutral or possibly budget-positive overall.

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