Question

Price (dollars per gallon) Quantity of demand Quantity supplied

1.00 600 0

1.50 500 200

2.00 400 400

2.50 300 600

3.00 200 800

3.50 100 1,000

4.00 0 1,200

4) The table gives the demand and supply schedules for milk in Cowburg. Assume that the only people who benefit from milk are the people who consume it and the only people who bear the cost of milk are the people who produce it. a) Draw the market demand and market supply curves. What are the equilibrium price and equilibrium quantity of milk? Is this equilibrium efficient? Explain. b) What is the maximum price that consumers are willing to pay for the 500th gallon? What is the minimum price that producers are willing to accept for the 500th gallon? Explain. c) If the market for milk is efficient, what is the consumer surplus? Show it on your graph. What is the producer surplus? Show it on your graph. d) If farmers produce 500 gallons a day, is there a deadweight loss? If yes, what is it? Explain your answer using your graph.

Answer 1

Answer:

1. Given the price, quantity demanded and quantity supplied, we compute the following demand and supply schedules. Now that the demanded schedule is downward sloping and the supply schedule is upward sloping. From the graph, you can tell that the equilibrium is at a point, where demand is equal to supply. This is when the price is $2, and as per our table, we know the equilibrium quantity is 400 gallons of milk. Yes the equilibrium is efficient because demand is exactly equal supply.

Price	Quantity Demanded	Quantity Supplied
1	600	0
1.5	500	200
2	400	400
2.5	300	600
3	200	800
3.5	100	1000
4	0	1200

1. Again, let us scan back to the table. The maximum price consumers will be willing to pay for 500 gallons of milk is going to be denoted by the price corresponding to the quantity demanded for this unit. That we can see is $1.5. The minimum price the suppliers will be willing to accept is the price that they would like for the quantity supplied at this unit (500th gallon) would be between $2 and $2.5
2. The consumer surplus is the area above the equilibrium price and below the demand curve. Similarly, the producer surplus is the area below the equilibrium price and above the supply curve. The blue highlighted triangle is the consumer surplus, whereas the red highlighted triangle is the producer surplus.

1. If farmers produce 500 gallons, there will be a deadweight loss. Why? well because the market is not at equilibrium anymore. Farmers would produce this amount at a price between $2 - $2.5, however consumers will be willing to only pay $1.5, and thus not all quantities supplied will be demanded. The green shaded area is the DWL.