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Gains From Trade

Consumer Surplus

Quantifying Welfare E ects

Producer Surplus

Welfare in Equilibrium

Willingness to Pay for 1 Unit

Q: How much would a consumer pay for a unit of a good?

A: Reservation Price = the maximum price that the consumer is willing to pay for a unit.

Example: suppose utility is quasilinear, i.e.

U(b, d) = v(b) + d,

where b is the number of beers consumed and d is the amount of money (dollars) spend on other goods.

Successive reservation prices:

1 r=

v (1)

v (0)

2 r=

v (2)

v (1)

. . .

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