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# lecture8full - When will a trade occur Compensating and...

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Recap Expenditure functions and Indirect utility functions Income and substitution effects Substitution effect: moving along original indifference curve need hicksian demands Income effect: moving from one indifference curve to another using the new prices Slutsky equation

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The Milkshake Problem Josh and Andrew have identical utility functions u ( x 1 , x 2 ) where x 1 is milkshakes and x 2 is other toys. Their incomes are the same, but Josh has a 1/2 off coupon for milkshakes. Can Josh and Andrew work out a trade where Andrew buys the coupon?
The Milkshake Problem 2 How do we get the income associated with B and B 0 ?

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Example: Cobb-Douglas E ( p 1 , p 2 , u ) = p α 1 p 1 - α 2 u ( 1 - α ) 1 - α α α

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Inverse demand curves

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Unformatted text preview: When will a trade occur? Compensating and Equivalent Variation After a change in prices, Compensating Variation (CV) is how much money an individual would have to get (or have taken away) to be indifferent to the change in prices Equivalent Variation (EV) is how much money an individual would be willing to pay (or be paid) in order to face the original prices CV, EV, and Inverse demand curves Tax revenue and deadweight loss When is there no deadweight loss? Deadweight loss and the elasticity of substitution Calculating deadweight loss Calculating deadweight loss 2...
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lecture8full - When will a trade occur Compensating and...

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