Supply and Demand- a Case Study Milk Price

The market deliver and fill curve above shows the milk monetary value support problem. In order to solve the milk overindulgencees in the market, the disposal should take the steps to increase the market consider to the milk products by exploring overseas markets. For instance, the politics should export the milk surpluses abroad. This would cut the footing of storage for milk products and encourages the local dairy farmers continue in dairy commercial enterprise. b. The littler dairy farmers would prefer the proposal 4 because it benefits them the most through the buyout program.This program encourages sm in every last(predicate) dairy farmers to switch from dairy business to other business. The rewards from government can be used as capital to start a new business. c. For consumers, they would prefer the proposal 2. Since the consumers are also the taxpayers, the dairy value support program is very costing to taxpayers. By eliminating the impairment support program, the consumers can enjoy the impose price of milk and the taxes to purchase unsold milk products can used to support other domestics goods that would be much benefits the consumers. d.The member of Congress who is concern about the eudaimonia of community will look with raise on the proposal 2. Since they investigated that the market for milk is a competitive market. Without the government intervention, the market equilibrium price for milk is set by the market strike and supply. For the benefits of consumers and taxpayers, they would enjoy a lower milk price than price floor. The problem of the farmers can be solved by increase the demand for dairy products, such as exports the milk surpluses abroad and promote the local brand of milk products to consumers. Question 2 a. When YED = 2,Income snap fastener of Demand, YED= Percentae change in measurement demandedPercentage change in income 2= ? Qd %12% ? Qd %=24 % The quantity demanded for own(prenominal) computer increases 2 4% as the customers income have risen by 12%. So, in order to meet my current inventory to the increase of quantity demanded by 24%, the price of individualised computer should be increased. When PED = 0. 5, Price Elasticity of Demand, PED= Percentage change in quantity demandedPercentage change in Price 0. 5= 24 %? Price % ? Price %=48 % ? The price of personal computer should be increase by 48% so that the quantity demanded will approximately equal my current inventory. . i. To moderate the price elasticity of demand, PED= ? Qd %? Price % PED=4. 3 %0. 25/1. 25? 100 PED=4. 3 %20% PED=0. cxxv ? When the price increased $0. 25 to $1. 50, an increase of 20%, the quantity demanded declined 4. 3%, the price elasticity of demand for subway rides is 0. 125. The elasticity is less than 1, so that the quantity demanded moves proportionately less than the price, demand is said to be inelastic. ii. Since the demand can be considered as the inelastic, the riders are less sensitive to the far e rises and there would likely because of no substitute way for riders in short period.Hence, the Transit Authoritys revenue increases as the fare rises. iii. From the estimation, the demand for subway rides is inelastic in short run. The estimation might be fallible because of the data gathered is only first month after the fare rises. After a weeklong period, the riders may choose not to use subway and find another way of transportation which is more economical to them. The switch of riders to substitute way of transportation means the quantity demanded for subway decreases. So, when the fare rises, the quantity demanded declines gradually, the price elasticity of demand would be higher and more elastic. . As a clever entrepreneur, it is of the essence(predicate) to measure how much the quantity demanded of a good responds to changes in consumers income. During the prosperity periods, the consumers income is higher, they would demand for normal goods and less demand for inferi or goods. In periods of printing, the consumers income decreases leads to an increase of quantity demanded for inferior goods because their acquire power is low. If the entrepreneur understands that inferior goods have negative income elasticity (Mankiw, 2007), he would probably switch his business to sell inferior goods.For example, a used-car seller who might sell branded luxury cars during prosperity periods. However, during depression periods, he might switch to sell low-cost cars in order to sustain his business. In conclusion, the direction is valid. Question 3 a. Diminishing returns to a single factor are observable in all doing processes at some level of inputs. The law of diminishing marginal productivity is defined as the marginal product of an input is the additional output generated by employing one more unit of the input, all other inputs held fixed.The extra output, or returns, to the single input diminish because all other inputs are held fixed. unrivaled of the factors is capital. For example, as the stock of capital rises, the extra output shitd from an additional of capital falls (Mankiw, 2007). Returns to scale are different from the returns to a single factor. Returns to scale are proportional increases in all inputs. While to each one factor in production process generates diminishing returns, the output may more than double, less than double, or exactly double when all the inputs are doubled.The distinction again is that with returns to scale, all inputs are increased in the same proportion and no input is held fixed. b. In filling a vacant position, we should be refer with the marginal product of the last worker hired because the marginal product measures the effect on output, or total product, of hiring another worker. It helps us to determine the revenue generated by hiring another worker and compared it to the cost of hiring another worker. This comparison shows that whether the hiring would help to increase the production.The point at which the intermediate product begins to decline is the point where fairish product is equal to marginal product. Although adding more workers results in a further decline in average product, total product continues to increase, so it may still be advantageous to hire another worker. When average product declines, the marginal product of the last worker hired is lower than the average product of previously hired workers. c. The isoquant identifies all the combinations of the two inputs which can produce the same level of output. The curvature of the isoquant is measured by the slope of the isoquant at any given point.The slope of the isoquant measures the rate at which the two inputs can be exchanged and still keep output constant, and this rate is called the marginal rate of technical substitution. Along the classifiable bowed-in or convex isoquant, the marginal rate of technical substitution diminishes as you move down on the isoquant. SECTION B Question 4 a. To fin d the equilibrium price and quantity, Qd=Qs 100-5P=5P 10P=100 P=10 When P = 10, Q=5P Q=510 Q=5 ? equilibrium price is $10, equilibrium quantity is 50 units Price of Negext, $ Market Equilibrium Quantity of Negext, Units 50 0 10 Supply Demand 20Consumer unnecessary maker lavishness interpret 2 The Negext Market Supply and Demand Consumer Surplus=12 ? $10 ? 50 =$ 250 Producer Surplus=12? $10 ? 50 =$ 250 full Surplus=Consumer Surplus+Producer Surplus Total Surplus=$250+$250 =$ 500 ? The consumer surplus is $250, the producer surplus is $250 and total surplus is $500. b. When 50 units of Negext are produced, Total represent of Pollution=50 ? 4 ? $1 =$ 200 The sellers would impose $4 for each units of Negext, so the price for Negext is $14. Total Surplus=$ 500-$200 =$ 300 ? The total surplus after taking into account the cost of pollution, it reduces to $ 300. . We can use total surplus to measure the welfare of buyers and sellers in Negext market. If the society banning Negext, n o demand from buyers, Negext will run out of business, the society is not in economic well- being. Both buyers and sellers do not enjoy any welfare from banning. When the total surplus is zero(a), the total market welfare is zero as well. d. Under the government restriction, the market only can produce 25 units of Negext. (100 units of pollution ? 4 units of pollution are divulgeted each Negext is produced= 25 units of Negext can be produced) Qs=25 units 00-5 P=25 P=$ 15 ? The new market equilibrium when the quantity 25 units and price is $ 15. Since the minimum cost to produce one unit of Negext is $5 (assuming the cost of production per Negext is $1 and cost of pollution is $4), so the supply of Negext decreases to zero when the price falls below $5. Graph 3 shows the Negext market after the restriction. This restriction limits the production to 25units and the price rises to $15. The consumer surplus decreases to $62. 50, producer surplus is $312. 50, and pollution cost is $100 . The total surplus falls $275.In short, this form _or_ system of government is not recommended because it reduces the total market welfare. Graph 3 The Negext Market Supply and Demand after the government restriction. Price of Negext, $ New Market Equilibrium Quantity of Negext, Units 0 Supply Demand 20 Producer Surplus 15 Consumer Surplus 25 5 Consumer Surplus=12? $5? 25 =$ 62. 50 Producer Surplus=12? ($10+$15)? 25 =$312. 50 Total Cost of Pollution=25 units Negext? 4 units pollution ? $1 =$ 100 Total Surplus=$ 62. 50+$312. 50-$100 =$275 e. The consumers and producers should bear the $2 tax respectively. Inverse Demand P=18-15QInverse Supply P=-2+15Q NEW Qd=90-5P NEW Qs=-10+5P Qd=Qs 90-5P=-10+5P P=10 Q=90-5(10) Q=40 units Refer to Graph 4, the market is in equilibrium when price is $10 and quantity, 40 units. However, the positive price paid by the consumers is $12 and the producers receiving price of $8. The tax revenue is $160. The consumer surplus is $160, producer surplus is $160, and total pollution cost is $160. The total surplus increases to $320. So, this policy is highly recommended because the increases of total market welfare that benefits all the society members.Graph 4 The Neget Market after government imposes tax. Price of Negext, $ Quantity of Negext, Units 40 0 10 Supply Demand 20 12 8 Tax Revenue=$4? 40 =$160 Consumer Surplus=12? $8? 40 =$160 Producer Surplus=12? $8? 40 =$160 Total Cost of Pollution=40? 4? $1 =$100 Total Surplus=$160+$160+$160-$160 =$320 f. When the cost of pollution is higher than $1, the total surplus decreases. The price paid by the consumer increases, the consumer surplus decreases. Then, it would affect the society well-being, especially the welfare of consumer is violated. This leads the consumers banning Negext.Moreover, if the production of Negext emit such high pollution to environment, the society should ban Negext for the safety and health of society. REFERENCES Smith, 2007. Chapter 6 answers (Online) Available From http//www. coloradocollege. edu/Dept/EC/Faculty/Smith/EC2070102/chap_06answers. htm (Accessed 16 July 2011) Wmich. Edu. 2010. Assignments In Class (Online) Available From http//homepages. wmich. edu/u5nwaogu/In%20Class%20Assignments/Inclass_3. pdf (Accessed 16 July 2011) Mankiw, N. Gregory. (2007). Principles of Economics, 4th Edition. ground forces Thomson South Western. pp97-99, 559-562