1.
Suppose that the market for milk is a competitive market and can be described
by the following demand and supply curves:
D
= 1,400 â 400P S = 400P â 200
Where
P = price per litre of milk
Calculate
the equilibrium price and quantity of milk and draw a diagram to illustrate
your answer.
Calculate
the (i) producer surplus (ii) consumer surplus (iii) economic surplus and (iv)
deadweight loss if the market for milk operates at the equilibrium price and
quantity.
Suppose
that the government imposes a price ceiling of $1 per litre of milk.
1. (i)
Illustrate the price ceiling on the diagram you drew in (a)
2. (ii)
How much milk is now purchased in the market?
3. (iii)
Calculate the amount of the surplus or shortage of milk created by the
imposition of the price ceiling.
4. (iv)
Calculate the (i) producer surplus (ii) consumer surplus (iii) economic
surplus
and (iv) deadweight loss after the introduction of the price ceiling.
(v) Is society better off following the
introduction of the price ceiling?
(vi) Are producers better off following
the introduction of the price ceiling?
(vii) Are consumers better off following the
introduction of the price ceiling?
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