The invention of a machine that increases milk production is discovered. If farmers were to decry the effect of this new technology on the price of milk and lobby government to set the price of milk at the price before the invention, what would be the result?
Excess demand for milk.
Excess supply of milk.
Neither a shortage nor a surplus.
A decline in the price of milk.
Draw a supply and demand graphs for milk. Now increase supply due to the new techonolgy. Now put a price floor equal to the original equalibrium price. What is quantity demanded at this price? What is quantity supplied?
Take it from here
If farmers were successful in lobbying the government to set the price of milk at the price before the invention of the milk production machine, the result would likely be an excess supply of milk.
Here's why:
1. The new technology that increases milk production would likely lead to a greater supply of milk in the market. Farmers would be able to produce more milk using the machines, resulting in an increase in the quantity supplied.
2. However, if the government sets the price of milk at the price before the invention, it essentially creates a price ceiling. This means that the price cannot go above that level, even if the supply increases.
3. With the price fixed below the equilibrium level (the price at which quantity supplied equals quantity demanded), the quantity demanded by consumers may not be sufficient to match the increased supply. This creates a situation of excess supply or a surplus of milk in the market.
4. An excess supply of milk implies that there is more milk available than consumers are willing or able to buy at the fixed price. This can result in issues such as wastage, spoilage, or the need for alternative uses of the excess milk.
Therefore, the likely result of setting the price of milk at the pre-invention level while experiencing an increase in milk production would be an excess supply of milk.