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Problem Set 2

ARE 2260 Spring 2024

The assignment is due Monday, February 19 by 11:59pm EST.

Max score: 60 (this will be converted to 6 points towards your final grade)

If you plan to take a waiver and submit your assignment within a week of the deadline, please notify the TA about your late submission. One waiver per semester is allowed.

1. Agricultural subsidies (15 points)

Pick a state that starts with the same letter as your last name (e.g., A for Andreyeva and I could choose any of the 4 states: Alabama, Alaska, Arizona or Arkansas). Pick the closest letter to your last name’s initial if there is no state beginning with the same letter (e.g., if your last name starts with B, pick either A or C).

Use this link to inform your answers about subsidies: USDA’s data on direct payments to farmers. You might want to independently find data on sales of agricultural products in your state in order to inform your answer in Part 3.

1. What are the top 3 types of agricultural subsidies in your state over the years? Describe major changes in the types of agricultural subsidies over 2014-2023.

2. How do the trends in your state subsidy payments compare to what we have observed in class for the overall US? If there are large differences, why do you think that might be the case?

3. How is your state affected by agricultural subsidies? Provide a brief summary on the role of subsidies in the state’s agriculture and overall economy. Briefly state your explanation for the observed results.

2. Price Elasticity and Tax Policy (10 points, note 2 parts to this question)

Part 1. Use Table 8.4 below to answer questions a-c.

a. Select one response. Suppose the government introduced a tax to increase the price of caloric sweetened beverages by 20%. Based on elasticities shown in Table 8.4 below, how much would purchased quantities of caloric sweetened beverages change in response to the new tax?

Increase 1.26%

Decrease 12.6%

Decrease 25.2%

Increase 20.2%

b. How much would the purchased quantity of bottled water change in response to this new tax on caloric sweetened beverages?

1. Increase 15%

2. Increase 7.5%

3. Decrease 7.5%

4. Decrease 0.75%

c. Now assume that the government wants to subsidize bottled water and provide a 10% price discount on bottled water purchases. Based on elasticities below, how much would the purchased quantity of bottled water change in response to the new subsidy for bottled water?

A. Increase 7.5%

B. Decrease 0.97%

C. Increase 9.7%

D. Increase 1.03%

Part 2. Would you support a policy to subsidize bottled water purchases? Provide a brief justification in favor of or against this policy (2-3 sentences). Consult the table above to inform your answer, but also think broadly about consumption of bottled water.

3. Subsidy Calculation (20 points)

Detailed instructions for this question are available in the folder “Problem Set 2” (Practice_Subsidy_Cost).

· Please calculate the total cost of providing a 50% subsidy on purchases of fruit and vegetables at farmers markets by SNAP participants. Assume you are estimating it for the state of Connecticut with 350,000 SNAP participants. The season for farmers markets and the use of subsidies is 5 months (May-September); subsidies can only be used during this period. Based on prior studies, you know that a typical SNAP participant who attends farmers markets will purchase 3 lb of fruit and 2 lb of vegetables per month. Average price for vegetables is $1.5 per lb and the price elasticity of demand for vegetables among SNAP participants is -0.6. Similarly, fruits are on average $2.5 per lb and the demand elasticity for fruit is -0.8. How much should the state of Connecticut expect to pay in total subsidies each season if only 20% of SNAP participants will attend farmers markets?

· What are the main goals of fruit and vegetable subsidies? Could these goals vary across subsidy programs?

· What could be an example of unintended negative consequences of providing such subsidies?

4. Consumer Price Index (CPI) (15 points)

Using data from the Bureau of Labor Statistics (BLS), extract data on CPI to replicate the graph below in Excel for any 3 food categories of your choice: e.g., food at home, fruit and vegetables and carbonated soft drinks (my graph shows 4 as I also wanted to look at alcohol prices). Submit an Excel file to show your work (no Google sheets). In addition to the graph, please answer the questions below.

· Calculate the inflation rate (price growth) for your 3 food categories for 1984-2023 as well as for the period that appears as having the highest inflation rate based on the graph and the period that has relatively low inflation rates.

· Discuss implications of different inflation rates across food groups for population diet and health.

· Compare changes in food prices across your categories versus changes in median US household income over this time. Use Census data to find information about household income (e.g., median household income was $26,430 in 1984). What do you learn from this comparison?

Instructions for finding and graphing the CPI data

If you’re not familiar with the BLS data, steps to get the data and generate a graph are detailed below.

· Find the BLS price data at: https://www.bls.gov/data/#prices

· Go to All Urban Consumers (Current Series), select “One Screen”

· Under 1, select “US city average”

· Under 2, scroll down the list of items to select “Food at home” (or any other items you need). If you’d like to select multiple categories, you can do so by holding CTRL when you select another food category.

· Under 3, select “Seasonally adjusted”

· Click “Add to selection”.

· Click “Get Data” (make sure your pop-up screen is not blocked).

· After you get a table of results, change the period at the top of the table from 2013 to 1984, so the period shown will be 1984-2023. Click Go.

· Select “Download an excel table”.

· If you didn’t select multiple food categories at the same time, repeat all steps starting with “Under 2, scroll down …”  for your 2^nd item, etc.

You should have 3 tables available for download into Excel with CPI results, which you can use to create a simple Excel graph to show trends, as below (the graph was intentionally saved as a picture here; you will need to save an Excel graph). You can use January data as datapoints for your graph.

5. Market Concentration (BONUS 5 points)

Based on your own search of data on any food industry or food retail, please describe market competition in the market of your choice, including measures of 4 firm concentration ratio (CR4) and the Herfindahl-Hirschman Index (HHI). Justify the choice of your market and comment on trends in market concentration of this market.

Please show your calculations and data used for this assessment.