Question

(37)Suppose the demand and supply equations in the market for fresh milk are given as D=340-3P and S=260+7P in the City of Los Angeles, what is the market equilibrium price and the market equilibrium quantity for fresh milk in this market?

(a)P=$6 ,Q= 412 liters

(b)P=$12,Q=520 liters

(c)P=$8,Q=316 liters

(d)P=$9,Q=285 liters

(38)Suppose now the City government in Los Angeles intervenes in the market for fresh milk referenced in Q#37 above and sets a price of $5 for a gallon of fresh milk, the pricing policy of the City government is called:

(a)A binding price floor

(b)A non-binding price ceiling

(c)A non-binding price floor

(d)A do nothing price

(39)Which of the following statements about the pricing policy adopted by the City government of Los Angeles in the market for fresh milk cited in Q#38 above is false?

(a)The pricing policy is set below the competitive equilibrium price of fresh milk

(b)The pricing policy creates more demand and less supply of fresh milk

(c)The pricing policy is set above the competitive equilibrium price for fresh milk

(d)The pricing policy will not hinder the capacity of the market forces from clearing the market

Answer 1

37. Ans: P = $8,Q = 316 liters

Explanation:

For equilibrium,

Demand = Supply

340 - 3P = 260 + 7P

10P = 340 - 260 = 80

P = 80 / 10 = $8      [Equilibrium price]

Q = 340 - 3(8) = 316 liters   [Equilibrium quantity]

Thus, option [c] is correct answer

38. Ans: A non-binding price floor

Explanation:

A binding price floor is one that is set above equilibrium price.

A non-binding price floor is one that is set below equilibrium price.

A binding price ceiling is one that is set below equilibrium price.

A non-binding price ceiling is one that is set above equilibrium price.

Since government set price of $5 which is below market equilibrium price ,i.e., $8, it is a non-binding price floor.

Thus, option [c] is correct answer

39. Ans: T he pricing policy is set above the competitive equilibrium price for fresh milk

Explanation:

Actually, t he pricing policy is set below the competitive equilibrium price for fresh milk. because $5 is less than $8.

Thus, option [c] is correct answer