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Ch14_class_09 - Chapter Fourteen Consumer's Surplus...

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Chapter Fourteen Consumer’s Surplus
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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?
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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
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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
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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
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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
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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
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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
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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
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$ 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
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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
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$ Equivalent Utility Gains Reservation Price Curve for Gasoline 0 2 4 6 8 10 Gasoline (gallons) ($) Res.
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