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Unformatted text preview: 1 EC201 2009, LSE Margaret Bray Class 4 For classes Monday November 9 Friday November 13. Class Quiz deadline: noon the day before your class. Measuring the Effects of Price Changes Consumer surplus, compensating variation, equivalent variation . Perloff ch 4.4, 5.1 & 5.2, McAfee and Lewis, ch 2.1, Morgan, Katz and Rosen ch 4.2-4.4, Katz and Rosen ch 4. Quiz 4 For classes Monday November 9 Friday November 13. Class Quiz deadline: noon the day before your class. Question 1 The price of good 1 increases from p 1A to p 1B . This changes utility from u A to u B . Click the correct statements 1. Compensating variation is the income you need to get utility u A . 2. Compensating variation is the extra income you need to get u A after the price change. 3. Compensating variation is E(p 1A ,p 2 ,u A ). 4. Compensating variation is E(p 1B ,p 2 ,u A ) E(p 1A ,p 2 ,u A ). 5. Compensating variation is the amount of income that has to be taken away from you without changing prices to have the same effect on your utility as the price change. 2 Question 2 x 2 F G x 1 gradient p 1B gradient p 1A u A Assume x 2 is expenditure on all other goods so p 2 = 1. D E O A Figure for question 2 The figure is an indifference curve diagram. Which length in the diagram is the compensating variation for an increase in the price of good 1 from p 1A to p 1B .? 1. OF 2. FG 3. OE 5. DE 6. DO 3 Question 3 compensated demand h 1 (p 1 ,p 2 ,u A ) p 1B p 1A 0 F G x 1 uncompensated demand x 1 (p 1 ,p 2 ,m) Figure for questions 3, 4 and 5 B C D H E A The figure is a demand curve diagram. Is good 1 1. normal 2. inferior 3. neither normal nor inferior 4 Question 4 compensated demand h 1 (p 1 ,p 2 ,u A )...
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- Spring '09