Question
2. Assume that the market for milk in the U.S. is competitive. The current demand and supply for milk are shown in the graph below.
2. Assume that the market for milk in the U.S. is competitive. The current demand and supply for milk are shown in the graph below. Use it to answer the questions below. a. If the market goes to its equilibrium, how much milk will be produced and exchanged? b. If the market goes to its equilibrium, what price will each gallon of milk be? c. In an effort to help struggling dairy farmers, the government decides to establish a minimum legal price for milk at $2.00 per gallon. As a result, will a shortage or surplus occur, and how large will it be? Briefly explain. Shortage or Surplus: Size of Shortage/Surplus:
d. Assume the market for milk is at its equilibrium in the graph above. now, due to the drought and fires in the western U.S., the price of almond milk (a substitute for milk) increases. What effect will this event have on the equilibrium in the market for milk above?
Equilibrium Price: Equilibrium Quantity:
e. Now suppose that in addition to the drought and fires, a cow disease forces many dairy farmers to shut down and exit the market. Compared to the initial equilibrium in the graph above, what effect will these two events together have on the equilibrium price and quantity of milk?
Equilibrium Price: Equilibrium Quantity:
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