Consider the following hypothetical supply and demand schedules for milk, with price (P) expressed in ¢/lb and quantities (Q) expressed in billion lbs: Supply: P = 10 + 0.8 Q Demand: P = 60 – 2 Q
a. Use a computer spreadsheet (e.g., Excel) to plot the supply and demand schedules in a single graph, with Q on the horizontal axis and P on the vertical axis. On the same graph, represent graphically the consumer surplus, producer surplus, and total surplus corresponding to the market equilibrium.
b. Compute the equilibrium price and the equilibrium quantity.
c. Calculate the consumer surplus, producer surplus, and total surplus corresponding to the market equilibrium.
d. Suppose now that the milk supply shifts, so that the new milk supply schedule is represented by the following equation: P = 15 + 0.8 Q Is this shift an increase or a decrease in milk supply? Provide an example of a possible explanation for such a shift in milk supply.
e. Compute the equilibrium price and quantity corresponding to the new supply schedule reported in (d).
f. Calculate the consumer surplus, producer surplus, and total surplus corresponding to the market equilibrium you computed in (e).
g. Based on your responses to (c) and (f), did the supply shift benefit or hurt milk consumers? By how much? Did the supply shift benefit or hurt milk producers? By how much?