Assume the demand and supply for milk are described through the following equations: QD = 600 - 100P; QS = -150 + 150P, where P is price in dollars, Q D is quantity demanded in millions of gallons per year, and Q S is quantity supplied in millions of gallons per year.
1. Create demand and supply tables corresponding to these equations and determine equilibrium price and quantity.
Now suppose the U.S. government imposes a $1 per gallon of milk tax on dairy farmers.
2. Using the demand and supply equations from question 1: What is the effect of the tax on the supply equation? The demand equation? What is the new equilibrium price and quantity?
3. How much do dairy farmers receive per gallon of milk after the tax? How much do demanders pay?
Now suppose the tax is placed on the buyers of milk. Does it matter who pays the tax?
Now repeat questions 2 and 3 assuming the government pays a subsidy of $1 per gallon of milk to farmers.
For Discussion: what does this problem suggest to you about the impact of government involvement in the supply and demand of specific products? How might similar involvement impact your company?
4. Answer the current debate over raising the minimum wage.
1. Is a minimum wage an equilibrium wage, a price ceiling, or a price floor?
2. What are the Pros and Cons about raising the minimum wage? (Use economic theory to defend your pros and cons, don't just make them up.)