Question

In 1991, the price of milk fell 30 percent. Senator Leahy of Vermont, a big milk-producing state, supported a law in the U.S. Congress to put a floor on the price. The floor was $13.09 per hundred pounds of milk. The market price was $11.47.

a. Draw a supply and demand diagram for milk and show how the equilibrium price and quantity would be determined in the absence of the price floor.

b. Using the diagram you just drew, explain the effects of the legislation.

c. The dairy farmers supported the legislation, while consumer groups opposed it. Why?

d. Economists frequently argue against price floors because of the surpluses and associated problems that they create. What are some of the potentially negative side effects of interference in the milk market?

Answer 1

In the absence of a price floor, the equilibrium price and quantity of milk would be determined where the supply and demand curves intersect. The legislation to put a floor on the price of milk would lead to a surplus of milk, as the quantity supplied would exceed the quantity demanded.

Step-by-step explanation:

a. In the absence of a price floor, the equilibrium price and quantity of milk would be determined where the supply and demand curves intersect. This is the point where the quantity demanded equals the quantity supplied. b. The legislation to put a floor on the price of milk would create a situation where the price is set above the equilibrium price. This would lead to a surplus of milk, as the quantity supplied would exceed the quantity demanded.

c. Dairy farmers supported the legislation because it would guarantee them a higher price for their milk and ensure their profitability. Consumer groups opposed the legislation because it would lead to higher milk prices for consumers. d. Some potential negative side effects of interference in the milk market include the creation of surpluses, which can lead to wasted resources and inefficiencies. It can also lead to higher prices for consumers, as well as distortions in the allocation of resources and potential market inefficiencies.