Ch14_class_09

# Ch14_class_09 - Chapter Fourteen Consumer's Surplus...

This preview shows pages 1–13. Sign up to view the full content.

Chapter Fourteen Consumer’s Surplus

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
Monetary Measures of Gains-to- Trade You can buy as much gasoline as you wish at \$1 per gallon once you enter the gasoline market. Q: What is the most you would pay to enter the market?
A: You would pay up to the dollar value of the gains-to-trade you would enjoy once in the market. How can such gains-to-trade be measured? Monetary Measures of Gains-to- Trade

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
Three such measures are: Consumer’s Surplus Equivalent Variation, and Compensating Variation. Only in one special circumstance do these three measures coincide. Monetary Measures of Gains-to- Trade
Suppose gasoline can be bought only in lumps of one gallon. Use r 1 to denote the most a single consumer would pay for a 1st gallon -- call this her reservation price for the 1st gallon. r 1 is the dollar equivalent of the marginal utility of the 1st gallon. \$ Equivalent Utility Gains

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
Now that she has one gallon, use r 2 to denote the most she would pay for a 2nd gallon -- this is her reservation price for the 2nd gallon. r 2 is the dollar equivalent of the marginal utility of the 2nd gallon. \$ Equivalent Utility Gains
Generally, if she already has n-1 gallons of gasoline then r n denotes the most she will pay for an nth gallon. r n is the dollar equivalent of the marginal utility of the nth gallon. \$ Equivalent Utility Gains

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
r 1 + … + r n will therefore be the dollar equivalent of the total change to utility from acquiring n gallons of gasoline at a price of \$0. So r 1 + … + r n - p G n will be the dollar equivalent of the total change to utility from acquiring n gallons of gasoline at a price of \$p G each. \$ Equivalent Utility Gains
A plot of r 1 , r 2 , … , r n , … against n is a reservation-price curve. This is not quite the same as the consumer’s demand curve for gasoline. \$ Equivalent Utility Gains

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
\$ Equivalent Utility Gains Reservation Price Curve for Gasoline 0 2 4 6 8 10 Gasoline (gallons) (\$) Res. Values 1 2 3 4 5 6 r 1 r 2 r 3 r 4 r 5 r 6
What is the monetary value of our consumer’s gain-to-trading in the gasoline market at a price of \$p G ? \$ Equivalent Utility Gains

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
Reservation Price Curve for Gasoline 0 2 4 6 8 10 Gasoline (gallons) (\$) Res. Values
This is the end of the preview. Sign up to access the rest of the document.

## This note was uploaded on 09/14/2009 for the course ECON 100A taught by Professor Babcock during the Summer '07 term at UCSB.

### Page1 / 55

Ch14_class_09 - Chapter Fourteen Consumer's Surplus...

This preview shows document pages 1 - 13. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online