Question

3. Suppose the U.S. government decides that the incomes of dairy farmers should be maintained at a level that allows the traditional family dairy farm to survive. It therefore implements a price floor of $1 per pint by buying surplus milk until the market price is $1 per pint. Use the accom- panying diagram to answer the following questions Price of milk (per pint) $1.20 1.10 Price floor 0.90 0.80 D, 0 550 600 650 700 750 800 850 Quantity of mik (millions of pints per year) a. How much surplus milk will be produced as a result of this policy? b. What will be the cost to the government of this policy? c. Since milk is an important source of protein and cal- cium, the government decides to provide the surplus milk it purchases to elementary schools at a price of nly $0.60 per pint. Assume that schools will buy any amount of milk available at this low price. But parents now reduce their purchases of milk at any price by 50 million pints per year because they know their children are getting milk at school. How much will the dairy pro- gram now cost the government? d. Give two examples of inefficiencies arising from wasted resources that are likely to result from this policy. What is the missed opportunity in each case?

Answer 1

a) demand (at f-d) 65, pply Cat f- t)- 45 Cost to Govt , = qovt buys huapua Nulk at $ = thus (ost-$100 Million-The Now at $1, demand by Pvout600 Milion 8uupu13 억 50-600-150 Million 8choct buuys 150 Miuion at s.G So paug to Govt.= -SGX 150 o total Cost to Govt 150-906o milion oot leads to deadut Less o Miion (a) 。dwegeaengH → du3toohon .an Consumer preference, buoz f0.Ce Sc osu Mik un exces, Move than the equioemeut, nce majoo Cost is boome by Gout 3as knd ot gulsidy Could Rave been used th other welyape programs → Missed oppotunity fog