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Lecture 18 - Economics 101A(Lecture 18 Stefano DellaVigna...

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Economics 101A (Lecture 18) Stefano DellaVigna October 29, 2009
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Outline 1. Consumer Surplus 2. Trade 3. Rent Control 4. Market Equilibrium in The Long-Run
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1 Welfare: Consumer Surplus Nicholson, Ch. 5, pp. 165-169 (Ch. 5, pp. 145—149, 9th) Welfare e ff ect of price change from p 0 to p 1 Proposed measure: e ( p 0 , u ) e ( p 1 , u ) Can rewrite expression above as e ( p 0 , u ) e ( p 1 , u ) = Ã e (0 , u ) + Z p 0 0 ∂e ( p, u ) ∂p dp ! Ã e (0 , u ) + Z p 1 0 ∂e ( p, u ) ∂p dp ! = Z p 0 p 1 ∂e ( p, u ) ∂p dp What is ∂e ( p,u ) ∂p ?
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Remember envelope theorem... Result: ∂e ( p, u ) ∂p = h ( p, u ) Welfare mesure is integral of area to the side of Hick- sian compensated demand Graphically,
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Example of welfare e ff ects: Imposition of Tax Welfare before tax Welfare after tax
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2 Trade Nicholson, Ch. 12, pp. 427-429 (Ch. 11, pp. 326— 327, 9th) Assume that domestic industry opens to trade Is this a good or a bad thing? Consider graphically Equilibrium with no trade at quantity X D and price p D
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