Market researchers have studied the market for milk, and their estimates for the
ID: 1204378 • Letter: M
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