• The effects of price controls and taxes on market decisions.
• Define the concepts of utility and elasticity, and how they impact consumer decisions on consumption and producer decisions on pricing.

Review the market supply and demand for raw milk in the table below:

Market Supply and Demand for Raw Milk

Price	Q Demanded	Q Supplied
$1.60	9,000	5,000
$2.00	8,500	5,500
$2.40	8,000	6,400
$2.80	7,500	7,500
$3.20	7,000	9,000
$3.60	6,500	11,000
$4.00	6,000	15,000

Given the market supply and demand for raw milk from the table above, discuss the following situations. Answer the following thoroughly in no less than three pages of content.

1. Suppose the market for raw milk is allowed to operate freely without any time of government interference. Determine the equilibrium price that will exist for raw milk. How much milk will be produced and purchased in the market? Why will this equilibrium exist?
2. Now suppose the government determines that a price floor of $4.00 is necessary. What reason would the government most likely give for the imposition of this price floor? Will the floor be above or below equilibrium price? At the new government mandated price, what will be the amount of the shortage or surplus? Be sure to fully explain why this shortage/surplus will exist when the government imposes the price control?
3. If the price floor results in a shortage or surplus, how will this affect consumers? If there is a shortage, what is the consequence? If there is a surplus, what is the consequence?
4. In a normal market situation, what happens to shortages, what happens to surpluses? Why does this not occur with a price floor or price ceiling?
5. Suppose now that the government has decided that equilibrium price is too high and mandates a price ceiling of $1.60 instead. How does this differ, in effect, from the price floor?
6. What is the elasticity of demand and supply for raw milk? How does this affect the amount of shortage or surplus that exists when the government intervenes?