Question

Given the following schedules relating to the weekly demand and supply of milk (in litres) for a given market,
Quantity
Demanded   Price
($ per litres)   Quantity
Supplied
5,000   2.00   14,000
6,000   1.75   12,000
7,000   1.50   10,000
8,000   1.25   8,000
9,000   1.00   6,000
10,000   0.75   4,000
11,000   0.50   2,000

if a free market were allowed to operate,

a.   What would be the equilibrium price of a litre of milk?
b.   What would be the equilibrium quantity?
c.   Would there be a shortage or a surplus at this price? If so, how much?

Now suppose that the government decided to interfere in the dairy market in an attempt to help lower income families purchase milk by passing a law stating that milk could not be sold for more than $0.75 per litre.

d.   Is the government imposing a price ceiling or a price floor?
e.   At this price, how much milk would be demanded?
f.   How much milk would be supplied?
g.   Would there be a shortage or a surplus? If so, how much?

Suppose that a new party was elected, and they passed a law to aid dairy farmers that would guarantee them a price of $1.75 per litre.

h.   At this new price, has the government imposed a price ceiling or a price floor?
i.   How much milk would be demanded?
j.   How much mild would be supplied?
k.   Would there be a shortage or a surplus? If so, how much?
l.   In this case, who wins and who loses? How?

Answer 1

Given the data, following are the answers:

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If a free market were allowed to operate,

a. What would be the equilibrium price of a litre of milk?

The price of a litre of milk will be $1.25

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b. What would be the equilibrium quantity?

The quantity will be 8,000 litres

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c. Would there be a shortage or a surplus at this price? If so, how much?

At equilibrium, there will be no shortage or surplus. The market gets cleared.

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Now suppose that the government decided to interfere in the dairy market in an attempt to help lower income families purchase milk by passing a law stating that milk could not be sold for more than $0.75 per litre.

d. Is the government imposing a price ceiling or a price floor?

This is a price ceiling. It is a legal maximum on the price of milk.

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e. At this price, how much milk would be demanded?

At this price, 10,000 litres of milk will be demanded.

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f. How much milk would be supplied?

At this price, 4,000 litres of milk will be supplied.

--
g. Would there be a shortage or a surplus? If so, how much?

There will be a shortage of 6,000 litres of milk.

--

Suppose that a new party was elected, and they passed a law to aid dairy farmers that would guarantee them a price of $1.75 per litre.

h.   At this new price, has the government imposed a price ceiling or a price floor?

This is a price floor. It is a legal minimum on the price of milk.

--
i.   How much milk would be demanded?

At this price, 6,000 litres of milk will be demanded.

--
j.   How much mild would be supplied?

At this price, 12,000 litres of milk will be supplied.

--
k. Would there be a shortage or a surplus? If so, how much?

There will be a surplus of 6,000 litres of milk.

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l.   In this case, who wins and who loses? How?

In any form of price control, equality is promoted at the expense of efficiency.

In a price ceiling, the consumers are benefited.

In a price floor, the producers are benefited.

However in both cases, efficiency is compromised, as the equilibrium gets disturbed.