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: A) consumers purchase more milk and more cereal. B) consumers purchase less milk and less cereal. C) consumers purchase more milk and less cereal. D) consumers purchase less milk and more cereal.

Question

Quizplus · Accepted Answer

The imposition of a $2.00 per gallon tax on milk increases the price of milk, which decreases the quantity demanded for milk due to its direct price effect. Since milk and cereal are complements, the decrease in demand for milk leads to a decrease in demand for cereal as well, resulting in consumers purchasing less of both.

Suppose Milk and Cereal Are Compliments and the Demand for Milk