2008FallMicroLecture9

2008FallMicroLecture9 - Classical Demand Theory III...

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Unformatted text preview: Classical Demand Theory III (Welfare) Benjamin Chiao Nov 26, 2008 (Afterclass version 1pm) Lecture Notes for Graduate Level Advanced Microeconomics, Peking University Guanghua School of Management 1/26 We have covered some tools and optimization methods in the last lectures. We will cover some considerations for applications for welfare analyses today. 2/26 Overview Welfare Evaluation Equivalent and Compensation Variations Applications: Taxation and Others Welfare Evaluation with Partial Information Approximating Welfare Measures Mid-Term Exam 3/26 ! Overview Welfare Evaluation Equivalent and Compensation Variations Applications: Taxation and Others Welfare Evaluation with Partial Information Approximating Welfare Measures Mid-Term Exam 4/26 I We have been discussing two approaches of demand theory: one that based on the weak axiom and the other on preferences I We &rst present one way to evaluatethe consumers level of well-being using the preference-based approach: I We &rst assume here that measurement is not a big problem 5/26 Assumptions I Consumer has a &xed wealth level w > I Most of the results here still hold when wealth is not &xed (Ex. 3.I.12) I Initial price level: p I Final price level: p 1 6/26 I Consumer is worse o/ i/ v ( p 1 , w ) & v ( p , w ) < I One important class of v ( p , w ) is the money metric indirect utility function: I e ( p , v ( p , w )) is strictly increasing in v ( p , w ) when p >> (by Proposition 3.E.2). Therefore, it can be viewed as an indirect utility function for % . I Thus, e ( p , v ( p 1 , w )) & e ( p , v ( p , w )) provides a measure of welfare changes expressed in dollars 726 Overview Welfare Evaluation ! Equivalent and Compensation Variations Applications: Taxation and Others Welfare Evaluation with Partial Information Approximating Welfare Measures Mid-Term Exam 8/26 Two Measures of Welfare Changes in Hicks (1939)...
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2008FallMicroLecture9 - Classical Demand Theory III...

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