Economics 101A – Fall 2008Problem Set Number 3Due: Tuesday September 23 in class1. The market for fluid milk (the kind that is sold by the quart or gallon) in California is inequilibrium at price p0. A lobby group of dairy farmers proposes to set up a subsidy program toincrease 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 p0) is needed?2. In some industries, including fishing, producers have to buy “quota rights” in order to legallysell output. For example, Alaska fishermen can buy quota that lets them sell a certain number ofpounds 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 isdetermined, when the total quota available is lessthan the equilibrium (free market) quantity thatwould prevail.
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