Chapter 4, Problem 1SQP

(a):

To determine

The equilibrium demand and supply of milk.

Explanation of Solution

The equilibrium demand and supply of milk in the economy can be obtained at the point of intersection of the market demand and supply curves in the economy. The market demand and supply schedules are given, and a graph can be plotted on the basis of the schedule as follows:

Price per gallon	Quantity demanded (millions of gallons)	Quantity supplied (millions of gallons)
$10.00	100	500
8.00	200	400
6.00	300	300
4.00	400	200
2.00	500	100

Based on this table, it is identified that the quantity supplied increases as price increases and there is a direct and positive relation between the price and quantity supplied. On the other hand, there is a negative relation between the quantity demanded and price because the quantity demanded decreases as price increases. Thus, the quantity demanded will be indicated by a downward sloping curve, whereas the quantity supplied will be indicated by an upward sloping curve as follows:

From the diagram, it is observed that the market demand for milk and the supply of milk intersect at Point E. The corresponding quantity at Point E will be the equilibrium quantity of milk, and the corresponding price at Point E will be the equilibrium price of the milk. Thus, at the point of equilibrium E, the equilibrium price is $6 per gallon and the quantity is 300 gallons per month.

Economics Concept Introduction

Equilibrium: Equilibrium in the market is obtained at the point where the market demand is equal to the market supply, and there is no excess demand or supply present in the economy.

(b):

To determine

The effect of support price of $8 per gallon of milk.

Explanation of Solution

From the diagram, it is observed that the market demand for milk and the supply of milk intersect at Point E. The corresponding quantity Point E will be the equilibrium quantity of milk and the corresponding price Point E will be the equilibrium price of the milk. Thus, at the point of equilibrium E, the equilibrium price is $6 per gallon and the quantity is 300 gallons per month.

However, when the government enacts the support price of $8 per gallon, the market price will be $8 per gallon. The quantity demanded at this price is 200 gallons per month, whereas the quantity supplied is 400 gallons per month. This means that there will be a surplus of 200 gallons of milk in the economy. The government has to purchase this excess surplus from the market. Since the government revenue is the tax revenue, the non–milk-drinking taxpayers have to pay for the milk indirectly.

(c):

To determine

The effect of ceiling price of $4 per gallon of milk.

Explanation of Solution

When the government enacts the ceiling price of $4 per gallon, the market price will be $4 per gallon. The quantity demanded at this price is 400 gallons per month, whereas the quantity supplied is 200 gallons per month. This means that there will be a shortage of 200 gallons of milk in the economy. The government has to ration the milk in order to prevent the black marketing of milk. This is caused due to the action of the government to keep the price of milk below the equilibrium level of $6 per gallon.