Chapter14 - Chapter 14 - Consumers Surplus 1. Basic idea of...

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Chapter 14 - Consumer’s Surplus 1. Basic idea of consumer’s surplus (a) want a measure of how much a person is willing to pay for something. How much a person is willing to sacriFce of one thing to get something else. (b) price measures marginal willingness to pay, so add up over all di±erent outputs to get total willingness to pay. (c) total beneFt (or gross consumer’s surplus), net consumers surplus, change in consumers surplus (see Fgure 14.1. in the textbook). 2. Discrete demand (a) remember that the reservation prices measure the “marginal utility” (b) r 1 = v (1) - v (0), r 2 = v (2) - v (1), r 3 = v (3) - v (2), etc. (c) hence, r 1 + r 2 + r 3 = v (3) - v (0) = v (3) (since v (0) = 0) (d) this is just the total area under the demand curve (e) in general to get the “net” utility, or net consumer’s surplus, have to subtract the amount that the consumer has to spend to get these beneFts 3. Continuous demand (see Fgure 14.2. in the textbook) (a) suppose utility has form
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Chapter14 - Chapter 14 - Consumers Surplus 1. Basic idea of...

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