Question

Table 5-5
Price Per         Gallons Demanded        Gallons Supplied
Gallon                Per Month                   Per Month
$4.00                   400                            1,400
$3.50                   600                            1,100
$3.00                   800                              800
$2.50                1,000                              500
$2.00                1,200                              200
$1.50                1,400                                50
$1.00                1,600                                 0

Refer to Table 5-5. If the government were to remove a price ceiling of $2.00 per gallon in the milk market, the result would be:

	A.	a decrease in price and increase in the quantity of milk supplied.
	B.	a decrease in price and increase in the quantity of milk demanded.
	C.	an increase in both price and the quantity of milk supplied.
	D.	an increase in both price and the quantity of milk demanded.
	E.	the market price of milk would remain constant and the quantity of milk supplied would equal the quantity demanded. the market price of milk would remain constant and the quantity of milk supplied would equal the quantity demanded. the market price of milk would remain constant and the quantity of milk supplied would equal the quantity demanded.

Answer 1

C. an increase in both price and the quantity of milk supplied.

When the price ceiling was $2.00, quantity demanded = 1200 and quantity supplied = 200. This means demand excess supply.
When the government removes a $2.00, so equilibrium would be reached. This means when quantity demanded would become equal to the quantity supplied. This happens when quantity = 800 and it is sold at a price of $3.00
So, both price and quantity supplied would increase whereas quantity demanded decrease.