Question 4: Milk PricesReducing a Price Floor1 Every month, the Pennsylvania Milk Marketing Board sets prices to farmers for milk. These prices are based on costs of transportation, packaging, shipping, and other costs. The nal calculated price becomes the minimum that farmers are guaranteed per hundred pounds of milk. This method of setting price oors has been in place for over 60 years, and in some ways has very little to do with the supply and demand for milk in Pennsylvania. For example, the formula price is based partly on the price of cheese in Wisconsin. The nal price does, however, include some level of market input, as it reects input from local milk retailers. Milk Marketing Board spokesperson Tracey Jackson indicates that it's done through a hearing process. Testimony is given by dealers and stores and the Milk Marketing Board. The board takes into account packaging, processing, union contractsanything that is necessary for the processing of milk. The set price is the wholesale price, not the one paid by consumers. Consumers are charged retail prices that uctuate based on local demand. The existence of price oors means that many farmers who could not survive at competitive market wholesale prices are able to remain protable. In April 1999, the price oor was decreased more than 30 percent. The change in prices sparked anger and frustration among some local dairy farmers and resignation among others. One Pennsylvania farmer, Russell Dietrich, said, "(T)he whole farm economy is going in the same direction. Grain prices were the rst to go, then pork. I think it's supply and demand that's doing it." But dairy farmer Hubert Sell observed, \"You have to be ready to weather the low points. You have to save when times are good." The reduction in price prompted state legislators to consider increasing the minimum price to reduce the uncertainty faced by farmers. Two letters to the editor of The Morning Call are indicative of the widely divergent opinions and understanding of the economics of price supports. One stated in part, "(Wlith even higher prices, farmers will increase the size of their herds. This will produce an even larger glut of milk on the market. . . . \" Another read, \"I don't know why the government, or whoever, is lowering milk prices. Dairy farmers and potato farmers, as well as other farmers, are always picked on. . . . Now they are about to take their prot margin away. I think it's a disgrace." 1. If the price falls to the new minimum, what does that imply about the true equilibrium price [the unsupported price)? 2. How might the Milk Board change its pricing formula to reect cost more accurately