Supply and Demand- a Case Study Milk Price

The market supply and demand curve above shows the milk price support problem. In order to solve the milk surpluses in the market, the government should take the steps to increase the market demand to the milk products by exploring overseas markets. For instance, the government should export milk surpluses abroad. This would cut the cost of storage for milk products and encourages the local dairy farmers to continue in the dairy business.

• a. The small dairy farmers would prefer proposal 4 because it benefits them the most through the buyout program. This program encourages small dairy farmers to switch from dairy business to another business. The rewards from the government can be used as capital to start a new business.
• b. For consumers, they would prefer the proposal

Since the consumers are also the taxpayers, the dairy price support program is very costing to taxpayers. By eliminating the price support program, the consumers can enjoy the lower price of milk, and the taxes to purchase unsold milk products can use to support other domestics goods that would be more benefits the consumers. The member of Congress who is concern about the welfare of the community will look with favor on the proposal. Since they investigated that the market for milk is a competitive market. Without government intervention, the market equilibrium price for milk is set by market demand and supply. For the benefits of consumers and taxpayers, they would enjoy a lower milk price than the price floor. The problem of the farmers can be solved by increase the demand for dairy products, such as exports milk surpluses abroad and promote the local brand of milk products to consumers.

Question 2

Hence, the Transit Authority’s revenue increases as the fare rise. From the estimation, the demand for subway rides is inelastic in the short run. The estimation might be unreliable because the data gathered is only the first month after the fare rises. After a longer period, the riders may choose not to use the subway and find another way of transportation which is more economical to them. The switch of riders to substitute way of transportation means the quantity demanded subway decreases. So, when the fare rises, the quantity demanded declines gradually, the price elasticity of demand would be higher and more elastic. As a clever entrepreneur, it is important to measure how much the quantity demanded of a good response to changes in the consumer’s income. During the prosperity periods, the consumer’s income is higher, they would demand normal goods and less demand for inferior goods. In periods of depression, the consumer’s income decreases lead to an increase of quantity demanded inferior goods because their purchasing power is low. If the entrepreneur understands that inferior goods have negative income elasticity, he would probably switch his business to sell inferior goods. For example, a used-car seller might sell branded luxury cars during prosperity periods. However, during depression periods, he might switch to sell low-cost cars in order to sustain his business. In conclusion, the statement is valid.

Question 3

Diminishing returns to a single factor are observable in all production processes at some level of inputs. The ‘law of diminishing marginal productivity’ is defined as the marginal product of an input is the additional output generated by employing one more unit of the input, all other inputs held fixed. The extra output, or returns, to the single input, diminishes because all other inputs are held fixed. One of the factors is capital. For example, as the stock of capital rises, the extra output produced from an additional capital falls. Returns to scale are different from the returns to a single factor. Returns to scale are proportional increases in all inputs. While each factor in the production process generates diminishing returns, the output may more than double, less than double, or exactly double when all the inputs are doubled. The distinction again is that with returns to scale, all inputs are increased in the same proportion and no input is held fixed.

In filling a vacant position, we should be concerned with the marginal product of the last worker hired because the marginal product measures the effect on output, or total product, of hiring another worker. It helps us to determine the revenue generated by hiring another worker and compared it to the cost of hiring another worker. This comparison shows that whether the hiring would help to increase the production. The point at which the average product begins to decline is the point where the average product is equal to the marginal product. Although adding more workers results in a further decline in the average product, the total production continues to increase, so it may still be advantageous to hire another worker. When the average product declines, the marginal product of the last worker hired is lower than the average product of previously hired workers. c. The isoquant identifies all the combinations of the two inputs which can produce the same level of output. The curvature of the isoquant is measured by the slope of the isoquant at any given point. The slope of the isoquant measures the rate at which the two inputs can be exchanged and still keep output constant, and this rate is called the marginal rate of technical substitution. Along the typical “bowed-in” or convex isoquant, the marginal rate of technical substitution diminishes as you move down along the isoquant.

SECTION B

Question 4

To find the equilibrium price and quantity,

Qd=Qs 100-5P=5P 10P=100 P=10 When P = 10, Q=5P Q=510 Q=5 

Reference

1. Smith, 2007.
2. http://www.coloradocollege.edu/Dept/EC/Faculty/Smith/EC2070102/chap_06answers.html (Accessed: 16 July 2011) Which. Edu. 2010.
3. http://homepages.wmich.edu/~u5nwaogu/In%20Class%20Assignments/Inclass_3.pdf (Accessed: 16 July 2011) Mankiw, N. Gregory. (2007).
4. Principles of Economics, 4th Edition. USA: Thomson South-Western. pp97-99, 559-562