a. Assuming there is no government intervention in this
market, what is the equilibrium price and quantity?
b. Now suppose the government guarantees milk producers
a price of $2 per litre (that is, 200 cents per litre) and
promises to buy any amount of milk that the producers
cannot sell. What are the quantity demanded and
quantity supplied at this guaranteed price?
c. How much milk would the government be buying (per
month) with this system of price supports, and how much
is the government paying for this milk?
d. Who pays for the milk that the government buys? Who is
helped by this policy and who is harmed?
15. This question is related to the use of output quotas in the milk
market in the previous question. Suppose the government used a
quota system instead of direct price supports to assist milk
producers. In particular, it issued quotas to existing milk
producers for 1.67 million litres of milk per month.
a. If milk production is exactly equal to the amount of
quotas issued, what price do consumers pay for milk?
b. Compared with the direct price controls in the previous
question, are milk producers better off or worse off, and
by how much?
Demand:p = 225 − 15 QD
Supply:p = 25 + 35 QS