Problem Set #3: Market Equilibrium and Government Intervention
1. A demand and supply situation for milk
is given in the accompanying diagram.
Prices are in $/Litre quantities are in
millions of litres.
a/ What is the equilibrium price and
quantity of milk?
b/ What is the total expenditure by
consumers at this equilibrium?
c/ Suppose that government imposes a
price floor of $1.00/litre for milk to
sustain small farm production by
promising to buy surplus milk.
i/ What is the quantity demanded and
the quantity supplied of milk at this
ii/ What is the amount of milk sold in the market? What is the amount of the surplus
or shortage of milk at this price?
iii/What must the government do to maintain this price floor in the face of market
forces? What is the cost to the government of this action?
2. The accompanying diagram shows
the demand and supply curves and
initial equilibrium for gasoline.
Prices are in $/litre and quantities
are in millions of litres.
a) What is the equilibrium price and
quantity? What is the total revenue
b) Suppose the government imposes a
price ceiling of $0.40 to conserve
i) What is the amount sold in the
market at this price ceiling?
ii) What is the surplus or shortage at this price ceiling?
iii) What is the price that will ensue if this output is sold on the 'black market'?
3. The following equaitons give market demand and supply for bushels of wheat.
1000P = 8000 – 0.001Q 1000P = 2000 + 2Q (P = $/bushel, Q =
a) Which is the demand curve?
b) What is the equilibrium price and quantity of wheat in this market?
c) What is the shortage or surplus of wheat in Canada if the price of wheat in the international