INSTRUCTOR DISCUSSION NOTES:
U.S. Cotton Growers face Political and Weather-Related Storms

1. Why will eliminating the subsidies increase the world price of cotton? Illustrate your answer with a graph of supply and demand for cotton; what changes as the subsidies are eliminated?

Supply will fall as the subsidies are eliminated, as will the real price of raising cotton in the U.S.; this will raise the price worldwide as it will reflect the true costs of growing and selling cotton..

2. Do consumers benefit from the elimination of the subsidy? Why or why not?

In the short run, no, because the price will rise. But in the longer run, price increases will likely lead to increased competition--which reduces the price. Then consumers will eventually benefit.

3. What happens to the distribution of consumer and producer surplus with the elimination of the subsidy?

Consumer surplus falls because prices rise. Producer surplus rises, but the distribution moves in the direction of foreign producers and shrinks for domestic producers.

Multiple Choice/True False Questions

1. A heavy drought in West Texas will:
  1. Raise demand for U.S. cotton.
  2. Lower demand for U.S. cotton.
  3. Raise supply of U.S. cotton.
  4. Lower supply of U.S. cotton.
ANS. d

2. As the subsidy is eliminated over time, and cotton farmers are forced to shoulder a larger burden of the risk of market fluctuations and weather changes, what will happen to the price of cotton?
  1. Lowers profits because production costs rise.
  2. Lowers profits because production costs fall.
  3. Higher profits because production costs rise.
  4. Higher profits because production costs fall.
ANS. a

3. The article suggests that the income of U.S. farmers will fall, even if the price of cotton rises. Assuming that U.S. supply of cotton doesn't change, what must also be happening for U.S. farmers' incomes to fall?
  1. Share of US cotton sold worldwide must fall
  2. Share of US cotton sold worldwide must rise
  3. Share of US cotton sold worldwide remains the same
  4. Share of world cotton sold must be falling.
ANS. a

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