Market researchers have studied the market for milk, and their estimates for the

Question

Market researchers have studied the market for milk, and their estimates for the supply of and the demand for milk per month are as follows: Using the above data, find the equilibrium price and quantity. Suppose the government enacts a milk price floor of $8.00 per gallon. Will this cause a surplus or a shortage? What is the amount of the surplus or shortage? Now assume the government decides to set a price ceiling of $4.00 per gallon. Will this cause a surplus or a shortage? What is the amount of the surplus or shortage?

Explanation / Answer

1. Equilibrium occurs at that price where quantity demanded equals quantity supplies.

Here, qty demanded = quantity supplied at price level of $6. Qty producesd equals 300

2. Price floor of $8 per gallon is set.

when price floor is above equilibrium price, it creates surplus in the market.

Amount of surplus = qty supplied at $8 - qty demanded at $8

= 400 - 200 = 200

3. Price ceiling is set at $4 per ggallon.

Now, when price ceiling is set below the equilibrium price, It creates shortage in the market.

Amount of shortage = Quantity demanded at $4 - quantity supplied at $4

= 400 - 200 = 200

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