Chapter 9. Chapter 9
Figure 9-2 shows the free-trade equilibrium under perfect competition and under monopoly (both with the price ). In this problem, we compare the welfare of Home consumers in the no-trade situation and under free trade.
Question 9.1
a. Under perfect competition, with the Price , label the triangle of consumer surplus and the triangle of producer surplus. Outline the area of total Home surplus (the sum of consumer surplus and producer surplus).
The figure is a 2d plot that shows the free-trade equilibrium under perfect competition and under monopoly. Both with the price, capital P sup W. The horizontal axis is labeled Quantity. The vertical axis is labeled Price. Four lines are shown on the plot. Two decreasing lines starting at the point P sub D are M R and D curves. Below them there is horizontal line corresponding to the marginal revenue, X star equals M R star. Below it, there is an increasing line starting at the point P sup M C and corresponding to M C curve. No-trade monopoly equilibrium occurs at the point A, when the quantity is Q sup M and the price is P sup M. Free trade equilibrium is achieved at the point B, where marginal revenue equals marginal costs. At this point, home firm supplies are S 1. The point B prime is the point where marginal revenue equals demand. At this point, home consumers demand is D 1.
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Work It Out, Chapter 9, Question 1
(Transcript of audio with descriptions. Transcript includes narrator headings and description headings of the visual content)
(Speaker)
This problem will ask you to compare the welfare of Home consumers in the no-trade situation and under free trade. In particular, this part of the question asks you to label the triangle of consumer surplus and the triangle of producer surplus, and outline the area of total Home surplus, which is the sum of consumer and producer surplus, under conditions of perfect competition with the price PW.
Let’s look at Figure 9-2 to begin and review the definitions of consumer surplus and producer surplus.
(Description)
A coordinate plane with the horizontal x-axis and the vertical y-axis is drawn.
The horizontal axis is labeled as Quantity, with points, Q superscript M, S subscript 1, and D subscript 1, indicated from left to right. The vertical axis is labeled as Price, with points, p superscript MC, p superscript W, p superscript M, and p superscript D, indicated from bottom to top.
A straight line sloping downward from the left upper corner at point, p superscript D, to the right lower corner of the plot is drawn. It is labeled D.
A straight line sloping downward from the left upper corner at point, p superscript D, to the right lower corner of the plot is drawn. It is labeled MR. The slope of line MR is greater than the slope of line D.
A straight line, parallel to the horizontal axis, which extends from point, p superscript W, on the vertical axis is drawn. It is labeled X star equals MR star.
A straight line sloping upward from the left lower corner at point, p superscript MC, to the right upper corner of the plot is drawn. It is labeled MC.
There are dotted lines drawn from point, p superscript M, on the vertical axis, which is parallel to the horizontal axis, as well as from points, Q superscript M, S subscript 1, and D subscript 1, on the horizontal axis, which are parallel to the vertical axis.
Point A with coordinates, Q superscript M and p superscript M, is plotted on line D. It is briefly labeled No-trade, monopoly equilibrium.
Point B, with coordinates, S subscript 1 and p superscript W, is plotted on the intersection of lines, MC and X star equals MR star. It is briefly labeled Free-trade equilibrium.
Point B prime, with coordinates, D subscript 1 and p superscript W, is plotted on the intersection of lines, D and X star equals MR star.
The region on the horizontal line between points, S subscript 1 and D subscript 1, is briefly labeled Imports, M subscript 1.
(Speaker)
Consumer surplus is the area of the triangle below the demand curve and above the equilibrium price. Producer surplus is the area of the triangle above the supply curve and below the equilibrium price.
We can now identify consumer and producer surplus as well as the area of total Home surplus.
(Description)
The triangular region is labeled Gains from trade and it has the following vertices.
The first vertex is point B.
The second vertex is point B prime.
The third vertex is a point of the intersection between lines, MC and D.
(Speaker)
Consumer surplus will be the area of the triangle described by PD, B prime, PW,
(Description)
The triangle with vertices, p superscript D, B prime, and P superscript W, is briefly shaded.
(Speaker)
producer surplus is the area of the triangle described by PW, B, PMC,
(Description)
The triangle with vertices, p superscript W, B, and P superscript MC, is briefly shaded.
(Speaker)
and the area of total Home surplus PD, B prime, BPMC.
(Description)
The triangle with vertices, B, B prime, and a point of the intersection between lines, MC and D, is briefly shaded.
Question 9.2
Work It Out, Chapter 9, Question 2
(Transcript of audio with descriptions. Transcript includes narrator headings and description headings of the visual content)
(Speaker)
This problem now will ask you to compare your answers to part (a) of this problem and part (a) of the last problem and to outline the area of gains from free trade under perfect competition.
(Description)
The graph from part a is shown.
The triangle with vertices, B, B prime, and a point of the intersection between lines, MC and D, is shaded. This area is labeled Gains from trade.
(Speaker)
We know from the last problem that under conditions of no-trade, the equilibrium price with perfect competition is at the intersection of the supply and demand curves. We also know from part (a) that PW is below the no-trade perfect competition equilibrium price, and consumers therefore demand more than domestic suppliers will supply. This demand is met by imports, and the gains from trade are illustrated by the shaded area on the graph.
Question 9.3
The figure is a 2d plot that shows the free-trade equilibrium under perfect competition and under monopoly. Both with the price, capital P sup W. The horizontal axis is labeled Quantity. The vertical axis is labeled Price. Four lines are shown on the plot. Two decreasing lines starting at the point P sub D are M R and D curves. Below them there is horizontal line corresponding to the marginal revenue, X star equals M R star. Below it, there is an increasing line starting at the point P sup M C and corresponding to M C curve. No-trade monopoly equilibrium occurs at the point A, when the quantity is Q sup M and the price is P sup M. Free trade equilibrium is achieved at the point B, where marginal revenue equals marginal costs. At this point, home firm supplies are S 1. The point B prime is the point where marginal revenue equals demand. At this point, home consumers demand is D 1.
Work It Out, Chapter 9, Question 3
(Transcript of audio with descriptions. Transcript includes narrator headings and description headings of the visual content)
(Speaker)
This problem now will ask you to label the triangles of consumer and producer surplus under monopoly, with the price still PW.
(Description)
The graph from part a is shown.
The triangle with vertices, B, B prime, and a point of the intersection between lines, MC and D, is shaded. It is labeled Gains from trade.
(Speaker)
The free-trade equilibrium under monopoly has a Home consumer surplus of PD, B prime, PW and a producer surplus of PW, B, PMC. This is identical to the free-trade surplus under perfect competition.
Question 9.4
d. Based on your answers to part (c) in this problem and part (d), the area of gains from free trade under Home monopoly is represented by:
The figure is a 2d plot that shows the free-trade equilibrium under perfect competition and under monopoly. Both with the price, capital P sup W. The horizontal axis is labeled Quantity. The vertical axis is labeled Price. Four lines are shown on the plot. Two decreasing lines starting at the point P sub D are M R and D curves. Below them there is horizontal line corresponding to the marginal revenue, X star equals M R star. Below it, there is an increasing line starting at the point P sup M C and corresponding to M C curve. No-trade monopoly equilibrium occurs at the point A, when the quantity is Q sup M and the price is P sup M. Free trade equilibrium is achieved at the point B, where marginal revenue equals marginal costs. At this point, home firm supplies are S 1. The point B prime is the point where marginal revenue equals demand. At this point, home consumers demand is D 1.
Work It Out, Chapter 9, Question 4
(Transcript of audio with descriptions. Transcript includes narrator headings and description headings of the visual content)
(Speaker)
Now, based on our answers to part (c) in this problem and part (d) in the last problem, let’s outline the area of gains from trade under Home monopoly.
(Description)
The graph from part a is shown.
(Speaker)
Recall from the last problem, under conditions of no-trade and Home monopoly, Home will produce at QM with a price of PM. From part (c), we know that with price PW, supply will be at S1, and demand will be at D1.
The area of the gains from trade under Home monopoly is the difference between the two, shown as the shaded area on the graph.
(Description)
The shaded area is represented by a four-sided figure with the following vertices.
The first vertex is point A.
The second vertex is point B prime.
The third vertex is point B.
The fourth vertex is a point of the intersection between lines, MR and MC.
This area is labeled Gains from trade.
Question 9.5
Work It Out, Chapter 9, Question 5
(Transcript of audio with descriptions. Transcript includes narrator headings and description headings of the visual content)
(Speaker)
Now let’s compare our answers to parts (b) and (d) and determine which area of gains from trade is greater and why.
The area representing gains from trade is larger in part (d) than in part (b).
(Description)
The graph from part d is shown on the left side. It is labeled part (d).
The graph from part b is shown on the right side. It is labeled part (b).
(Speaker)
This is because the opening of trade in the monopoly case eliminates the monopolist’s ability to charge a price higher than the perfectly competitive price. As such, trade additionally eliminates the deadweight loss associated with monopoly, making gains from trade under Home monopoly greater than under perfect competition.