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Question(s) / Instruction(s):

3. Assume that the unregulated supply schedule for milk is the following:

Price (per pound) $ .05 .07 .08 .10 .14
Qty supplied (billions of lbs per year) 42 53 63 76 103

(a) Draw the supply and demand curves for milk, assuming that the demand for milk is perfectly inelastic and consumers will buy 53 billion pound of it. What is the equilibrium price?

(b) Suppose that the farmers’ response to the governments’ offer to pay them for not producing milk results in the following supply schedule:
Price (per pound) $ .05 .07 .08 .10 .14
Qty supplied (billions of lbs per year) 19 30 40 53 80

(c) Draw this new supply curve on the same set of axes as the supply curve prior to the government’s action. What is the equilibrium price following the government’s action?

(d) How much more money would consumers pay for the 53 billion pounds of milk because of the higher equilibrium price?

(e) Shade in the area in your diagram that represents how much more consumers will pay because of the government-sponsored cutbacks.

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