Suppose that (cow's) milk and organic fertilizer (i.e., the manure produced by dairy cows) are joint products and independent in consumption. Assume that milk is a normal good and that organic fertilizer (manure) is independent of income (i.e., fertilizer demand does not change when income changes). Suppose that consumer income increases. Illustrate and explain the resulting effects on the market equilibrium price and quantity in both the milk market and the organic fertilizer (manure) market. In each market, clearly illustrate and label the new market equilibrium quantity and price.
Specifically:
a) Illustrate and explain the effects of the increase in consumer income in the milk market. In particular, illustrate the change in demand or supply and the resulting quantity demanded, Qd, and quantity supplied, Qs, at the initial market equilibrium price of milk, P0*, and the shortage or surplus that develops in the milk market at P0*. Explain the adjustment process to the new market equilibrium price and quantity. Finally, clearly illustrate the resulting change in producers surplus.
b) Given the changes in the milk market, illustrate and explain the subsequent effects in the fertilizer (manure) market. In particular, illustrate the change in demand or supply and the resulting quantity demanded, Qd, and quantity supplied, Qs, at the initial market equilibrium price of fertilizer, P1*, and the shortage or surplus that develops in the fertilizer market at P1*. Explain the adjustment process to the new market equilibrium price and quantity. Finally, clearly illustrate the resulting change in consumers surplus.