-The table above shows the demand and supply schedules for milk in Cowland. A subsidy on milk of $1 per gallon is proposed and the government asks you to examine the effects of the subsidy.
a) Draw the demand and supply curves. If there is no subsidy, what is the price of milk and how many gallons are sold?
b) With the subsidy, what is the price that consumers pay? What is the price that sellers receive? How many gallons of milk are sold?
c) Assuming no external costs and benefits, what is the efficient level of milk production? Explain.
d) With the subsidy, what is the marginal social benefit from milk? What is the marginal social cost of milk? If the subsidy is introduced, will the level of production be efficient? Why or why not?
Definitions:
United States
A country in North America, consisting of 50 states, known for its significant economic and political influence globally.
Currency
A system of money in general use in a particular country or economic context.
Floating Rate System
A currency exchange system where the value of a currency is allowed to fluctuate according to the foreign exchange market.
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An agreement under international law entered into by countries in written form and governed by international law.
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