Problem 1 Quota: The yearly demand for milk in the European Union (E.U.) is QD = 590 -1.25P where quantities are measured in millions of tons and prices in euros per ton. a) Graph the demand function for milk by placing Q on the x-axis and P on the y-axis. Make sure that you indicate the choke price and the numerical value of the Q-intercept of the demand function. The milk industry in the E.U. was regulated with a production quota. The production quota consists of Q = 90 million tons of milk per year. Because of the production quota, the price of one ton of milk in the E.U. was 400 euro per ton: P = 400. b) What is the numerical value of the annual consumer surplus currently earned by E.U. con- sumers in the market for milk? Illustrate it on the graph of part a). On April 2015, the milk production quota in the E.U. was set to expire and the market for milk in the E.U. deregulated. c) Did the deregulation of the milk market help or hurt milk consumers? Explain the intuition of your answer. d) Is it possible that milk producers as a group were better off by the elimination of the milk production quota? Explain in words in no more than two sentences. (Hint: You can draw a new graph and refer to it if you find it helpful.) Assume that the supply of milk in the E.U. on April 2015 was given by Qs = -112 + P and the demand for milk is the one given above, QD = 590 -1.25P. e) Graph the demand and supply functions of milk on a new graph. Make sure that you indicate the P-intercept of the supply function. f) What will the equilibrium price and quantity be after the market for milk is deregulated? Indicate the equilibrium in the graph of part e). g) Under these circumstances, what will be the numerical value of the change in total surplus in the E.U. due to the deregulation of the market for milk? Illustrate the change in total surplus on the graph that you drew in part e). h) Would the change in consumer surplus due to the deregulation of the milk market be greater or smaller if the supply were more elastic at Q = 90? Explain by referring to a graph that contains the demand function of part a) and two supply functions - with different elasticities - that intersect at Q = 90.