The dairy industry is an example of cartel pricing: the government has set milk

Question

The dairy industry is an example of cartel pricing: the government has set milk prices artificially high. Sketch a graph of a supply curve (call it s) and a demand curve (call it d). Label the equilibrium price p* and quantity q*. Then label a price that is greater than p*. Let q^+ be the quantity for which the demand curve passes through p^+. Because it's hard to enter p*, p*, etc., in the homework system, let's call the equilibrium price p star, the equilibrium quantity q star, and similarly call the increased price p plus and corresponding quantity q plus. On your graph, mark an area corresponding to the consumer surplus when the price is p plus. Express this area as an integral (which may involve some of S, d, and the prices and quantities p star, p plus, q star and q plus): Similarly, on your graph mark an area corresponding to the producer surplus when the price is p plus. Express this area as an integral (which may also involve some of s, d, and the prices and quantities p star, p plus, q star and q plus): The total gains from trade are given by the sum (Consumer surplus + Producer surplus). How does this sum change when the price is changed from p* to p^+?

Explanation / Answer

(a) Answer to 1st blank: D(q)

    Answer to 2nd blank: a = 0

    Answer to 3rd blank: b = q+

(b) Answer to 1st blank: S(q)

    Answer to 2nd blank: a = 0

    Answer to 3rd blank: b = q+

(c) The sum decreases.

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