A price subsidy of 20 cents per gallon on milk (which does not have a perfectly inelastic demand curve)will result in a:
A)change in consumer tastes.
B)decrease in the equilibrium price of 20 cents per gallon.
C)decrease in the equilibrium price of less than 20 cents per gallon.
D)decrease in the equilibrium price of more than 20 cents per gallon.

Question

Quizplus · Accepted Answer

Since milk does not have a perfectly inelastic demand curve, the decrease in the equilibrium price will be less than the price subsidy of 20 cents per gallon. This is because the decrease in price will result in a higher quantity demanded, but not everyone will increase their consumption by the same amount. Thus, the equilibrium price will decrease, but by less than 20 cents per gallon.

A Price Subsidy of 20 Cents Per Gallon on Milk