Posted by **Suzy** on Friday, May 10, 2013 at 10:14am.

Suppose the demand and supply for milk are described by the following equations: QD = 600 - 100P; QS = -150 + 150P, where P is price in dollars, Q D is quantity demanded in millions of gallons per year, and Q S is quantity supplied in millions of gallons per year

1. Use these equations to determine equilibrium price and quantity

Now suppose the U.S. government imposes a $1 per gallon of milk tax on dairy farmers.

1. Using the demand and supply equations from question 1: What is the new equilibrium price and quantity?

1. How much do dairy farmers receive per gallon of milk after the tax? How much do demanders pay?

2. Now suppose the tax is placed on the buyers of milk. Does it matter who pays the tax?

Now, what is the new equilibrium price and quantity assuming the government pays a subsidy of $1 per gallon (no tax now, just the subsidy)?

1. After the subsidy, how much do dairy farmers receive per gallon of milk after the tax? How much do demanders pay?

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