Comments on Problem Set #2

Here are some comments I've made to people regarding some of the homework problems. I hope they are helpful to you.

On problem #1

To M. May:

Well, the "missed opportunity" in the milk case is one where too much milk is produced when those resources could have been used for other things. So yeah, "overproduction" is correct.

Also, think about this: who is buying up the excess supply? (yeah, government) Could they use that money for other things? (yeah, think about it).

BTW, elasticity doesn't really play into this problem. Just consider the inefficiencies of the price floor (the surplus milk).

Note also, the price of milk at the price floor is higher than it would have been otherwise (compare to equilibrium).

From the context of the problem, you should assume the schools would be delighted to buy milk at the price of 60-cents. No need to deal with over purchasing it. (The question reads something like "assume schools will buy all that is available at that price.) Of course there is always some waste but that's the nature of goods that spoil. Assume they don't waste any more than usual whether the price is $1, 90 cents, or 60 cents.

On problem #2:

You are asked to calculate the deadweight loss. To do this you first need to identify the deadweight loss on a diagram. Then once you've identified it, and it should be a triangle, you can calculate the area of the triangle using the formula for the area of a triangle:

1/2 x base x height. The answer is in terms of dollars.

On problem #4:

This is really only an elasticity of demand question.

Assume no real change in demand for coffee. Since the problem leads you to believe supply has increased, what happens to the price of coffee? Now, if the price moves this way and the revenues that coffee farmers recieve has fallen, is demand elastic or inelastic?

You do have the analytical tools for this!