The blend price formula was employed to determine the fluid milk 

 price and utilization with the 1965 blend price, manufacturing price, 

 the demand function for fluid milk, and total milk consumption. ^"^ The 

 estimated price-quantity curve describes how prices received by farmers 

 would vary as quantity of milk varies under the existing blend pricing 

 system with the demand relationships of 1965. 



Implications of the Price-Quantity Equilibrium 



The four supply relations and two demand situations provide a 

 total of eight price-quantity equilibrium situations to be analyzed. 

 These eight price-quantity equilibrium components are shown in Figure 

 7 and Table 12. For comparison, the weighted average price and quan- 

 tities produced in 1965 and the departures from each of the eight esti- 

 mated equilibrium prices and quantities are included. The closest to 

 1965 is Equilibrium No. 9, the one developed on the basis of the 

 classified milk market structure with blend price relationship con- 

 fronting farmers and a supply function that reflects the 1965 resource 

 base and transportation differentials between the 20 areas in the 

 Northeast. 



Most outstanding in the analysis of the eight estimated equilibrium 

 situations is the error in estimating quantity when supply functions 

 were based upon the 1960 resource base. This error was sizable for both 

 demand situations and both supply assumptions. See Equilibriums 2, 3, 

 6, and 7 in Table 12 and Figure 7. 



The use of the demand function developed by linear summation 

 also introduced a source of error. For example. Equilibriums 4 and 5 

 for supply function with the 1965 resource base in which the demand 

 function assumes away classified pricing and inshipments of milk. 



PiQi H- P2Q2 

 25 The standard blend price formula is : P 



B Ql + Q2 



However in developing the price-quantity disappearance curve, P , P2, and 



B 



Ql + Q2 are predetermined. The problem is to find the Class I Price. Pi, and Class I 

 utilization, Qi, such that the price-quantity disappearance curve will pass through 

 the point. 



Substituting the linear demand function relating Qi to Pi, and solving by the 

 binomial theorem yields: 



-(a-bPo) + V(a-bP2)2 - 4b(PoQ _ aP> - Q P 1 



Pl= [ ' B 



2b 

 Where : 



Pi = Price of Class I (^ fluid) milk 



P2 = Price of Class II (manufacturing) milk 



P = Blend price 



B 

 Qi^ Quantity of milk for Class I (fluid) use 

 Q2 = Quantity of milk for Class II (manufacturing) use 

 Ql + Q2=Total quantity of milk, Q 



t 

 Ql = a + bPl = Demand function for Class I milk 



37 



