Suppose milk and cereal are compliments and the demand for milk is Q^d_m = 40 - 6P_m - 2P_c,where Q^d_m stands for millions of gallons of milk demanded,P_m stands for the price of milk and P_c stands for the price of cereal.The supply of milk is Q^s_m = 6P_m - 8,where Q^s_m stands for millions of gallons of milk supplied.The demand and supply of cereal are Q^d_c = 90 - 5P_c - P_m and Q^s_c = 5P_c - 10,respectively,where Q^d_c stands for millions of boxes of cereal demanded and Q^s_c stands for millions of boxes of cereal supplied.Suppose the government imposes a $2.00 per gallon tax on milk.In the new general equilibrium:

Question

Quizplus · Accepted Answer

When a $2.00 per gallon tax is imposed on milk, the supply curve of milk shifts upward by $2.00, resulting in a new equilibrium price of milk, which is higher than the original price. As a result, the demand for cereal decreases due to the increase in the price of a complementary good, milk. This decrease in demand shifts the demand curve of cereal to the left, causing the equilibrium price of cereal to decrease. Therefore, the price of milk is higher, and the price of cereal is lower in the new general equilibrium.

Suppose Milk and Cereal Are Compliments and the Demand for Milk