Suppose the inverse demand and supply for milk in the European Union (EU) is giv

Question

Suppose the inverse demand and supply for milk in the European Union (EU) is given by

p=120?0.7Qd    p=8+0.2Qs

Where the quantity is in millions of litres and the price is in cents per litre. Assuming that the EU does not import or export milk.

Answer the following:

Write your answers to 2 decimal places.

a) Find the market equilibrium quantity, Q?Q?.

b) Find the equilibrium price, p?p?.

c) Find the consumer surplus at the market equilibrium.

d) Find the producer surplus at the market equilibrium.

e) The European farmers successfully lobby for a price floor of p¯=38p¯=38 cents per litre. What will be the new quantity sold in the market, Q¯Q¯?

f) Find the new consumer surplus after the price floor.

g) What is the deadweight loss from the price floor?

Explanation / Answer

(a) In equilibrium, demand price equals supply price at a common quantity (Q).

120 - 0.7Q = 8 + 0.2Q

0.9Q = 112

Q* = 124.44

(b) p* = 120 - (0.7 x 124.44) = 120 - 87.11 = 32.89

(c) From demand function, when Qd = 0, p = 120 (Reservation price)

Consumer surplus = Area between demand curve & market price = (1/2) x (120 - 32.89) x 124.44

= 62.22 x 87.11 = 5,419.98

(d) From supply function, when Qs = 0, p = 8 (Minimum acceptable price)

Producer surplus = Area between supply curve & market price = (1/2) x (32.89 - 8) x 124.44

= 62.22 x 24.89 = 1,548.66

NOTE: As per Chegg Answering Policy, first 4 parts have been answered.

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