Question

1. Suppose that the quantity demanded and quantity supplied in the market for milk is as follows:
   

Price per Gallon	Quantity Demanded	Quantity Supplied
$5	1,000	5,000
$4	2,000	4,500
$3	3,500	3,500
$2	4,100	2,000
$1	6,000	1,000

2.a. What is the equilibrium price and quantity of milk?
2.b. If the government places a price ceiling of $2 on milk, will there be a shortage or surplus of milk? How large will it be? How many gallons of milk will be sold?

Answer 1

Answer : 2)a) Based on given table, at $3 the quantity demanded = quantity supplied = 3,500 gallons. As quantity demanded and quantity supplied are equal at $3 price level hence $3 is the equilibrium price level.

b) At $2 price level the market faces a situation of shortage. Because at $2 price level the quantity demanded is higher than the quantity supplied.

At $2 price level the shortage = Quantity demanded - Quantity supplied = 4,100 - 2,000 = 2,100 gallons.  

Therefore, at $2 price level the market faces a shortage situation of 2,100 gallons.

As at $2 price level the quantity supplied is 2,000 gallons hence the market will sell 2,000 gallons of milk at $2 price ceiling.