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A severe drought can actually lessen the total amount of

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Senior Manager
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A severe drought can actually lessen the total amount of [#permalink] New post 15 Apr 2004, 07:53
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A
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C
D
E

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4.A severe drought can actually lessen the total amount of government aid that United States farmers receive as a group. The government pays farmers the amount,if any, by which the market price at which crops are actually sold falls short of a preset target price per bushel for the crops. The drought of 1983, for example, caused farm-program payments to drop by $10 billion.
Given the information above, which of the following, if true, best explains why the drought of 1983 resulted in a reduction in farm-program payments?
(A) Prior to the drought of 1983, the government raised the target price for crops in order to aid farmers in reducing their debt loads.
(B) Due to the drought of 1983, United States farmers exported less food in 1983 than in the preceding year.
(C) Due to the drought of 1983, United States farmers had smaller harvests and thus received a higher market price for the 1983 crop than for the larger crop of the preceding year.
(D) Due to the drought of 1983 , United States farmers planned to plant smaller crops in 1984 than they had in 1983.
(E) Despite the drought of 1983, retail prices for food did not increase significantly between 1982 and 1983.


A and C are contenders. Pls explain your answer.
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 [#permalink] New post 15 Apr 2004, 08:19
It has to be C.

If the harvest is low then the demand for the products shootsup nearing the target price set by the government. Hence government will pay less to the farmers to compensate the difference in the selling price and the target price.
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 [#permalink] New post 15 Apr 2004, 08:23
target price - real price = minimum.
Thanks to drought, price goes up, hence the differential decreases. Answer is A.
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 [#permalink] New post 15 Apr 2004, 08:26
C)

The government decides price like this .
Aid Paid = (PresetValue - Market Value).

If Market value increases then aid Paid will actually decrease. During a drought the price per bushel actually increases (lower production) so aid paid is less.
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 [#permalink] New post 15 Apr 2004, 08:54
I agree with Version2. It has to be C.
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 [#permalink] New post 15 Apr 2004, 13:18
Let's say the target price prior to 1983 was 40$ and the market price was 30$. This means that farmers are short 10$ and the government will provide them with subsidy to cover for the shortfall. A says that the target was increased, say to 50$. This means that the subsidy should have been increased because the shortfall will be now 20$. Yet, the stem says that the subsidy was reduced by $10B despite the increase in the target price. A clearly does not resolve the paradox
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  [#permalink] 15 Apr 2004, 13:18
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