Econ 1b, Foldvary

The lump-sum subsidy
20 pts.
Due Thursday, Apr 12, on paper

Suppose that there are a million corn farmers in atomistic competition, all producing an identical type of corn. Wheat farmers are also in atomistic competition. Both corn and wheat farmers are in long-run equilibrium. Assume that the marginal cost is upward sloping.

Then in an election year, Congress enacts a law that gives all corn farmers a lump-sum subsidy every year. Anyone who enters the corn industry and meets a minimal requirement gets the subsidy. Assume that all farmers seek to maximize profits.

In the new long-run equilibrium, what is the effect of the corn-farm subsidy on the quantity of corn produced on each farm? (Does the quantity increase, decrease, or stay the same?)

Full credit will be given only if, besides providing the correct answer, you show how you obtain your answer. Graphs are useful in solving this.