Consider the market for wholesale market for milk in Tasmania in 2019 with a perfect elastic supply curve and downward sloping demand curve. The current equilibrium price of milk is $0.55 is per litre and 950 million litres of milk is bought and sold.

Suppose that in 2020 due to lower feed costs for dairy cows, the price drops to $0.45 per litre. Illustrate the change in equilibrium price and quantity and any changes in the demand or supply ofwholesale milk in Tasmania.

Question

1. Calculate the change in the price using the cross/mid-point formula. Use the demand elasticity for wholesale milk of = - 0.5 to estimate the % change in quantity demanded for wholesale milk in 2020.