Question 5 (20 marks) The table below 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. Price (dollars gallon) Quantity demanded Kuantity supplied per millions of gallons (millions of gallons per year) per year) 320 10 2240 1160 80 80 160 240 0 a) Draw the demand and supply curves. If there is no subsidy, what is the price of milk and how many gallons are sold? (5 marks) 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? (5 marks) c) Assuming no external costs and benefits, what is the efficient level of milk production? (2 marks) 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 (8 marks) not? THE END Cscanned with CamScanner

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