The figure given below shows a situation where the producers of good X are forming an international cartel. Here, MR = Marginal Revenue, MC = Marginal Cost, and P = Price. The cartel use monopoly pricing for its output. How much well-being would world lose as a result of the formation of the cartel?

Question

The figure given below shows a situation where the producers of good X are forming an international cartel. Here, MR = Marginal Revenue, MC = Marginal Cost, and P = Price. The cartel use monopoly pricing for its output.  How much well-being would world lose as a result of the formation of the cartel?

Quizplus · Accepted Answer

The world well-being loss due to the formation of the cartel equals the deadweight loss. The monopoly pricing leads to a reduction in output from Qc to Qm, where MC = MR. The corresponding price is $22.5. The total well-being loss is given by the area of the triangle BAC, which is (1/2)(25-22.5)(Qc-Qm) = (1/2)(2.5)(80-60) = $25 billion. However, this overstates the net loss to the world since the cartel members gain producer surplus. The gain in producer surplus is given by the area of the rectangle ABDG, which is (25-22.5)(Qc-Qm) =$7.5 billion. Thus, the net well-being loss to the world is $25 billion - $7.5 billion = $17.5 billion, which is closest to the choice B of $12.5 billion.

The Figure Given Below Shows a Situation Where the Producers