1: A supply and demand model for milk in the US Current milk consumption in the US is about 130 lb/capita/year. The average price of milk is $0.50/lb. The demand elasticity for milk has been estimated to be about -1.6. The supply elasticity for milk production in the US has been estimated to be about 0.4. Part 1: Constant-elasticity model 1. Calibrate a constant-elasticity demand function for milk in the US. Solution: The constant-elasticity demand function has the form = . The resulting demand elasticity is . Since we are told that the demand elasticity is -1.6, it must be that = 1.6. The unknown parameter can be found by stating that the observed equilibrium occurs on the demand curve: 130 = (0.50)1.6, which implies that = 130 (0.50)1.6 42.9. Therefore, the demand function is = 42.91.6. 2. Calibrate a constant-elasticity supply function for milk in the US. Solution: The constant-elasticity supply function has the form = . The resulting supply elasticity is . Since we are told that the supply elasticity is 0.4, it must be that = 0.4. The unknown parameter can be found by stating that the observed equilibrium occurs on