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Abstract
Micro-economic models posit that transaction costs isolate subsistence producers
from output market shocks. We integrate microeconomic models of many
heterogeneous households into a general-equilibrium model and show that supply
on subsistence farms may respond, in apparently perverse ways, to changes in
output market prices. Price shocks in markets for staple goods are transmitted to
subsistence producers through interactions in factor markets. In the case
presented, a decrease in the market price of maize reduces wages and land rents,
stimulating maize production by subsistence households; however, real income of
subsistence households falls.