Question 1

Milkis flowing like never before in the U.S., where dairies have expanded output enough to send wholesale prices plunging from an all-time high in September. Production in the 12 months through October reached 17.08 billion pounds a month on average, up 1.8 percent from the same period a year earlier, as farmers took advantage of highmilkprices and low livestock-feed costs, government data show. Two years of record corn harvests in the U.S. sent grain prices to a five-year low. Grains are mainly used as feed for cow farmers.Imports of milk to the US have also increased during the period as countries such as New Zealand are also benefiting from good market conditions During this time, however, demand for the good has not been able to keep up with the supply.

Notably, the current market conditions are not expected to last with impending drought conditions that would impact the harvest of corn and result in an increase in its price. With higher prices for grains, some farmers may no longer be able to afford to keep their current livestock and they may resort to selling their cows to be butchered for beef.

https://www.bloomberg.com/news/articles/2014-12-11/milk-glut-triggers-price-slump-in-win-for-butter-eaters

i.Illurates and explain how the market for milk in the US economy will maintain equilibrium over time given the problem that will exist with current demand conditions. [4 marks]

ii. Is demand for milk price elastic or price inelastic? Explain your reasoning. [3 marks]

iii.Discuss one-factor EACH that you think influences demand and supply for milk. Provide examples [4 marks]

iv.With the impending drought conditions illustrate and explain what will happen to (1) the market for milk, and (2) the market for beef. [4 marks]

v.Explain how revenue for both milk producers and beef producers will be impacted by the drought conditions. [4 marks]