Varian_Chapter14_Consumer's_Surplus

# Varian_Chapter14_Consumer's_Surplus - Chapter Fourteen...

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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?
± 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: z Consumer’s Surplus z Equivalent Variation, and z 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

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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
± 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
± 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 23456 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

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± The dollar equivalent net utility gain for the 1st gallon is \$(r 1 -p G ) ± and is \$(r 2 G ) for the 2nd gallon, ± and so on, so the dollar value of the gain-to-trade is \$(r 1 G ) + \$(r 2 G ) + … for as long as r n G > 0. \$ Equivalent Utility Gains
\$ Equivalent Utility Gains Reservation Price Curve for Gasoline 0 2 4 6 8 10 Gasoline (gallons) (\$) Res. Values 1 23456 r 1 r 2 r 3 r 4 r 5 r 6 p G

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\$ Equivalent Utility Gains Reservation Price Curve for Gasoline 0 2 4 6 8 10 Gasoline (gallons) (\$) Res. Values 1 23456 r 1 r 2 r 3 r 4 r 5 r 6 p G
\$ Equivalent Utility Gains Reservation Price Curve for Gasoline 0 2 4 6 8 10 Gasoline (gallons) (\$) Res. Values 1 23456 r 1 r 2 r 3 r 4 r 5 r 6 p G \$ value of net utility gains-to-trade

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± Now suppose that gasoline is sold in half-gallon units.
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## This note was uploaded on 07/28/2010 for the course ECON 301 taught by Professor Hansen during the Fall '08 term at University of Wisconsin.

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Varian_Chapter14_Consumer's_Surplus - Chapter Fourteen...

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