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Assume that the market for milk is initially perfectly competitive. 1. Draw a supply and demand...

Assume that the market for milk is initially perfectly competitive.

1. Draw a supply and demand diagram showing the equilibrium quantity of milk produced and the market price. Be sure to label all part of your diagram.

2. On your diagram from Part (a), label the consumer and producer surplus.

3. Suppose that the government permits an industry association to form which issues production quotas to each dairy farmer. If the sum of the quotas are less than competitive market quantity, draw a new Supply and Demand diagram to show the effect of the quota on the market price.

4. On your diagram from Part (b), label the consumer and producer surplus. How have consumer and producer surplus changed as a result of the quota system?

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