30 Apr Question: A) Draw a demand and supply model to illustrate the effects of a government subsidy paid to milk …
a) Draw a demand and supply model to illustrate the effects of a government subsidy paid to milk farmers for every litre of milk they sell. (Chapter 6 of the text can help you with this). Assume that demand for milk is relatively inelastic, while the supply of milk is relatively elastic. Illustrate and explain what happens to the price farmers receive, the price buyers pay, the cost to government and the quantity of milk sold. (Do not use actual numbers, but rather symbols such as P1, Q1 etc. Make sure you define what the symbols you use represent.) b) Who benefits most from the subsidy in this scenario – milk producers or milk consumers? Explain your answer. c) Identify the dead weight loss of the milk subsidy on your diagram, and explain why it arises.
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