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 - 400P S = 400P - 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?