Figure 9-1 shows the Home no-trade equilibrium under perfect competition (with the price PC) and under monopoly (with the price P M). In this problem, we compare the welfare of Home consumers in these two situations.

a. Under perfect competition, with the price PC, 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).

b. Under monopoly, with the price PM, label the consumer surplus triangle.

c. Producer surplus is the same as the profits earned by the monopolist. To measure this, label the point in Figure 9-1 where the MR curve intersects MC at point B′. For selling the units between zero and QM, marginal costs rise along the MC curve, up to B′. The monopolist earns the difference between the price P M and MC for each unit sold. Label the difference between the price and the MC curve as producer surplus, or profits.

d. Outline the area of total Home surplus with a Home monopoly.

e. Compare your answers to parts

(a) and (d), and outline what the difference between these two areas is.

What is this difference called and why?

a. Under perfect competition, with the price PW, 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).

b. Based on your answers to part

(a) in this problem and part

(a) of the last problem, outline the area of gains from free trade under perfect competition.

c. Under monopoly, still with the price PW, again label the triangle of consumer surplus and the triangle of producer surplus.

d. Based on your answers to part

(c) in this problem and part

(d) in the last problem, outline the area of gains from free trade under Home monopoly.

e. Compare your answers to parts

(b) and (d). That is, which area of gains from trade is higher and why? LO.1