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Gains From Trade

Consumer Surplus

Quantifying Welfare E ects

Producer Surplus

Welfare in Equilibrium

Reservation Prices & Demand

E x a m p l e : i f r 4 p r 3 , t h e c o n s u m e r w i l l d e m a n d 3 b e e r s .

R e s e r v a t i o n P r i c e C u r v e f o r ( $ ) R e s . R e s e r v a t i o n p r i c e

Values

r1 r r3 2

r r5 r6 4

p

1

2

3

4

5

6

Beer

G

li

(

ll

)

Assumption: the more you have already consumed, the lower the reservation price for the next good. (Downsloping demand)

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