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Gains From Trade

Consumer Surplus

Quantifying Welfare E ects

Producer Surplus

Welfare in Equilibrium

Willingness to Pay for

Units

Q: How much is the consumer willing to pay for n beers? A: v(n). Why? Use reservation prices to show:

1 2 3 r +r +r

=

v (1)

=

v (3)

v(0) + v(2)

v(1) + v(3)

v (0) (

ssume v(0) = 0)

This is called gross bene t or gross gains from trade

v (2)

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

)

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