The market for milk gallons can be described by the following demand and supply
ID: 1210954 • Letter: T
Question
The market for milk gallons can be described by the following demand and supply curves:
Demand: P=3.00-0.25Q
Supply: P=0.25Q
* P=price of milk gallons Q=quantity of milk gallons
a) What is the equilibrium price and quantity of the milk gallons? Calculate how much consumer and producer surplus is generated in this market? Include a graph in your answer and indicte consumer and producer surplus on the graph.
b) A price floor of $2 per gallon of milk is set. What is the new equilibrium price and quantity? Calculate new consumer surplus, new producer surplus and deadweight loss (if any) and indicate it on the graph. Who gains/loses from this price floor?
c) Using equilibrium price and quantity from parts a and b, calculate the elasticity of demand for milk. Is te demand elastic or inelastic?
d) How are revenues affected by the imposition of the price floor in pat b? Is this consistent with the answer in part c? Include a graph in the answer?
Explanation / Answer
a) By equating demad and supply function we get the equilibrium quantity as,
3.00-0.25Q = 0.25Q
=>0.50Q = 3
=>Q = 6
By putting this Q in Supply function we can get the equilibrium price as,
P = 0.25*6
=>P = 1.50
Producer Surolus = 0.5 * equilibrium quantity * equilibrium price
=> PS = 0.5*6*1.5
=> PS = 4.50
b) Price is floored at $2 so the new price is $2 and new quantity is
Q = 1/0.25
=> Q = 4
c) Elasticity of demad = % Change in Quantity Demanded / % Change in Price
=> Ed = 2/0.5
=> Ed = 4
So the demad is perfectly elastic as its value is more than 1.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.