The figure below shows the result of a price fixing scheme that raised price above competitive levels at point C to a price of $15 at point M. When antitrust enforcement agents break up this price-fixing cartel,consumers will gain $__________ of consumer surplus.

Question

The figure below shows the result of a price fixing scheme that raised price above competitive levels at point C to a price of $15 at point M.  When antitrust enforcement agents break up this price-fixing cartel,consumers will gain $__________ of consumer surplus.

Quizplus · Accepted Answer

Consumer surplus is the difference between what consumers are willing to pay and what they actually pay. In a competitive market, consumers would pay the equilibrium price at point C (which is $10) and receive consumer surplus above that price. However, the price-fixing cartel raises the price to $15 at point M, resulting in a loss of consumer surplus. When the price-fixing scheme is broken up and the market returns to a competitive equilibrium, consumers will gain back the lost consumer surplus. The triangle between points C, M, and the demand curve represents the lost consumer surplus, and its area can be calculated using the formula (1/2) x (base x height). In this case, the base is 4 (the change in quantity demanded) and the height is $5 (the difference between the price at M and the price at C). Plugging in these values, we get (1/2) x (4 x $5) = $10. Multiplying this by the total number of consumers in the market (2,000), we get $20,000 as the total gain in consumer surplus.

The Figure Below Shows the Result of a Price Fixing