2-23-09 - The change in income that is the equivalent to...

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Microeconomics – Class Notes – 2/23/09 HOMEWORK PROBLEMS: Chapter 5 Workbook : 1-8, 11-13, 15-18, 23 Chapter 5 – Textbook : 1-8, 12, 13, 25, 27, 32, 33, 36 For exam, you need to know: CONSUMER SURPLUS AND NET UTILITY Consumer surplus is also a bribe to not consume the good at all Talked about the demand curve as a series of reservation prices It’s also the difference between willingness to pay and what you have to pay If your utility is not represented by quasilinear preferences, then consumer surplus is not a good representation Compensating variation : The amount of money that would fully compensate the consumer for the change in price. The change in income that moves the consumer back to his/her original indifference curve. Equivalent variation : The amount of money needed to be taken away or given to the consumer in order to affect her as much as the price change.
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Unformatted text preview: The change in income that is the equivalent to the change in price Rule: | C.V |> |change in C.S | > |E.V | Normal good | C.V |< |change in C.S | < |E.V | inferior good Change in consumer surplus excellent job at estimating the compensating variation and equivalent variation For quasilinear preferences: CV = change in consumer surplus = EV CHAPTER #5 POLICY Food Stamps vs. Cash Federally funded program run by the stamps Why do we give food stamps instead of cash? o Economists believe that more options for consumption are always better: Which way are the lines moving? How do you know, based on the movement of the lines, that people are better off with cash rather than food stamp money? This is a more accurate representation of reality, but public policy is such that food stamps are preferred LABOR SUPPLY...
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2-23-09 - The change in income that is the equivalent to...

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