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School
McMaster University
Department
Commerce
Course
COMMERCE 4FP3
Professor
Anna Robertson
Semester
Winter

Description
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 price? 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 of producers? b) Suppose the government imposes a price ceiling of $0.40 to conserve gasoline. 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 = bushel/wheat) 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 intern
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