Assume that the demand curve for milk is given by Q = 100-10P, where P is the price of milk per

liter and Q is the number of liters demanded per year. The supply curve is horizontal at a price

of $2.

a. Assuming that the market is competitive, what is the price per liter of milk and the

number of liters sold?

b. With connivance of some politicians, the dairy farmers are able to form and maintain a

cartel. What would be the cartel price?

c. What are the rents associated with the cartel price?

d. Suppose that in order to maintain the cartel, the dairy farmers simply give lump sum

campaign contributions to the relevant politicians. What is the maximum contribution

they would be willing to make? What is the deadweight loss of the cartel?