Question

In: Economics

2) 1. A) Draw demand and supply curves for the market for milk. Show the equilibrium...

2) 1. A) Draw demand and supply curves for the market for milk. Show the equilibrium price and quantity combination (where the curves intersect).

B) Graphically illustrate and explain the impact of a government law that sets the price of milk above the price given by the intersection of the curves. Be sure to identify the groups that are helped by the law and those that are hurt. Explain how the law impacts these groups.

C) Explain the unintended consequences of the law.

D) Using the demand and supply curve model, make a recommendation about whether the law should be kept, changed, or repealed.

Solutions

Expert Solution

A.

B. When government sets the price above the equilibrium price then this is known as Price Floor. when government imposes prive floor then it will increase the price if milk as a result quantity supplied is now greater than quantity demanded. Hence, there is surplus available in the market as shown in the graph there is surplus of Q2Q1 in the market.

Price floor is mainly done on agricultural prouct to give assurance of minimum price for their production.

C. Consequence of price floor will be surplus. Since price is now higher than the equilibrium price this will create surplus in the market. Hence after a point government has to buy those surplus output from the producers and provide subsidy to the buyer so that he can buy the surplus from the government.

It also leads to waste of output as price is higher after Government intervention.

D. Government should keep the law as it protect the producer from any price fluctuation.


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