1.Suppose the model of Supply and Demand is used to make predictions about changes in the equilibrium price and the equilibrium quantity of dairy products.

Interpret the policy scenario within an agricultural market: In this first scenario, our goal is to predict the impact of a new dairy policy on the dairy product market.New policies typically cause changes in the non-price determinants of either demand or supply.

As the new policy takes effect, identify the correct function (either dairy-product supply or dairy-product demand), and predict the appropriate direction of change (increase or decrease) in supply or demand.

Then predict the impacts of the policy change on the equilibrium dairy-product price and the equilibrium dairy product quantity.

Illustrate your answer with a simple graph. Remember, sometimes complex analyses can cause an end-result of an "indeterminate change" in either the equilibrium price or quantity.

To accompany the graph, give a complete explanation of what is happening in the graph. As part of your answer, describe why the change in the market equilibrium price and quantity occurred, and whether this prediction "makes sense" in comparison to outcomes in the real world dairy product market.

Scenario #1:

Let's use the model of supply and demand to predict the effects on the dairy-product market because of changes in dairy policy introduced in the 2018 Farm Bill. Specifically, the 2018 Farm Bill increased government subsidies to help improve the profitability of small dairy farms.

The 2018 Farm Bill initiated the Dairy Margin Coverage Program (DMCP). The DMCP is the new name for the Margin Protection Program (MPP) that operated under the previous 2014 Farm Bill.

Thanks to increased federal subsidies in the 2018 Farm Bill, the DMCP sharply reduces the premiums that small dairy operations pay to participate. The DMCP makes it possible for dairy producers to purchase "profit margin insurance" for a lower cost.

For example, the DMCP noticeably decreased the producer's premium cost to purchase margin coverage for the first five million pounds of production (roughly equivalent to 240 cows). The DMCP also increased the maximum available margin coverage level from $8 per hundredweight to $9.50.

Long story short, small dairy producers can use this DMCP to purchase more "margin insurance" coverage for a lower premium expense.

Assume that the DMCP premiums paid by small dairies are a real "cost of production" to manage financial risk.

You can consider DMCP "margin insurance" as a scarce resource used in the production of dairy products. Margin insurance is productive input in a dairy operation. This insurance can be just as important as hiring land, labor, capital and entrepreneurship to produce dairy output.

In this scenario, assume that the new subsidy levels included in the 2018 Farm Bill increase the government's share of the true DMCP premium-cost per hundred-weight of dairy output.

In other words, when small dairy producers purchase DMCP coverage under the 2018 Farm Bill, their share of the premium cost decreases.

Please do the following for this scenario:

Apply the supply-and-demand model to predict the impact of this increased producer subsidy for DMCP coverage on the equilibrium price and equilibrium quantity of dairy products.

How might agricultural economists use "producer and consumer surplus" analysis to raise questions about the market efficiency effects of increased subsidies for dairy products production? Think about how government interference in a market creates deadweight losses. Explain your reasoning fully.