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Unformatted text preview: Chapter 06 - From Demand to Welfare Chapter 6: From Demand to Welfare Main Concepts and Learning Objectives This chapter focuses on the impacts of price changes on consumer decisions and consumer utility. This includes income and substitution effects of a price change, the impact of the change in price of a single good on utility, and construction of an index to measure the impacts of multiple price changes on utility. These concepts are used to analyze labor supply decisions and income-compensated demand curves. Students who master the material presented in this chapter will able to: • Use a budget line / indifference curve diagram to illustrate the income and substitution effects of a price change • Measure the impacts of compensated and uncompensated price changes using either a budget line / indifference curve diagram or a demand curve • Analyze the income and substitution effects of a change in wages • Explain sources of bias in the consumer price index. Multiple Choice Quiz (10 questions) covering main points: 1. An uncompensated price change a. requires compensation payments by the seller. b. is not the same as the price changes we normally observe. That is why compensation is needed. c. is the same as the price changes we normally observe. There is no addition or subtraction to income to ensure that the price change does not alter consumer utility. d. requires compensation payments by the buyer. 2. The substitution effect of a price change a. moves the consumer along one indifference curve. b. is the same as the impact of a compensated price change. c. both of the above d. none of the above 3. The income effect involves: a. no shift in the budget line. b. rotation of the budget line. c. a parallel shift in the budget line. d. none of the above 4. For a normal good, the income and substitution effect work a. in the same direction. b. in opposite direction. c. either a or b is possible 6-1 Chapter 06 - From Demand to Welfare 5. Application 6.1 states that the elasticity of demand for shochu 8.81. This implies that shochu a. is an inferior good. b. is a Giffen good. c. is a normal good. d. both a and b 6. Compensating variation is the amount of money that a. exactly offsets the effect of a price change, and keeps the consumer on the same indifference curve. b. measures the variation of income across individuals. c. none of the above 7. Consumer surplus is a. the area between the demand curve and the line that represents price – and between the quantity zero and the quantity purchased by the consumer. b. the consumer's total net benefit. c. both a and b d. none of the above 8. Hausman estimated consumer surplus from cell phones a. by estimating the demand curve and then computing the area between that demand curve and the price line....
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This note was uploaded on 04/06/2011 for the course ECON 3332 taught by Professor Craig during the Spring '11 term at Rensselaer Polytechnic Institute.
- Spring '11