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ps3 - Economics 101A Fall 2008 Problem Set Number 3 Due...

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Economics 101A – Fall 2008 Problem Set Number 3 Due: Tuesday September 23 in class 1. The market for fluid milk (the kind that is sold by the quart or gallon) in California is in equilibrium at price p 0 . A lobby group of dairy farmers proposes to set up a subsidy program to increase milk consumption by 10%. If the elasticities of supply and demand are 1.0 and ! 1.5, respectively, how big a subsidy (as a fraction of p 0 ) is needed? 2. In some industries, including fishing, producers have to buy “quota rights” in order to legally sell output. For example, Alaska fishermen can buy quota that lets them sell a certain number of pounds of fish. Quota rights are often transferrable at a market price (e.g., the price of “medallions” in the NYC taxi industry). a) Draw a supply-demand diagram and show how the price of a unit of quota rights is determined, when the total quota available is less than the equilibrium (free market) quantity that would prevail.
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