Jim Whitney Economics 131

Trade under domestic monopoly conditions

Suppose the following depicts domestic demand and cost conditions for cassette players:

Part 1: Pretrade (autarky) situation:
                                               Price   Output
    pc: for a perfectly competitive industry:  $ 80     240
    m: for a monopoly industry:                 112    144

    --Use an "A" to denote the deadweight loss which results from a monopoly.

Part 2: Free trade situation (for a small country):

    Hypothetical world price of cassette players (given in class): ______
    --In your diagram:
        --depict your free trade quantity produced, consumed and traded.
        --use a "B" to denote your gains from trade if the industry had been perfectly competitive before trade.

Now consider instead the monopoly situation.
    --Use "///" to shade the combined pretrade consumer and producer surplus.
    --Use "\\\" to shade the combined free trade consumer and producer surplus.
    --Use a bold outline to inducate the change in national welfare which results from free trade.

    --Comparing your monopolistic pretrade situation and your free trade situation, decide whether each of the following is true or false:
    ___ (1) Domestic consumption rises with free trade.
    ___ (2) Domestic production rises with free trade.
    ___ (3) The country imports cassette recorders with free trade.
    ___ (4) The overall gains from trade are larger than they would have been if the industry had been perfectly competitive before trade.