ch14lec - Chapter 14 Consumers Surplus Econ 306 Monetary...

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Chapter 14 Consumer’s Surplus Econ 306
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Monetary Measures of Gains-to-Trade •Y o u c a n b u y a s m u c h s p r i n g w a t e r a s y o u w i s h at $1 per gallon once you enter the sprint water market. •Q : W h a t i s t h e m o s t y o u w o u l d p a y t o e n t e r t h e market? •A : Y o u w o u l d p a y u p t o t h e d o l l a r v a l u e o f t h e gains-to-trade you would enjoy once in the market. • How can such gains-to-trade be measured?
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•T h r e e s u c h m e a s u r e s a r e : – Consumer’s Surplus (What we are going to study right now) –Equ iva len t Va r ia t ion (means how much money would have to taken away from the consumer before the price change to leave him as well off as he would be after the price change) (Measures the maximum amount of income that the consumer would be willing to pay to avoid the price change) Monetary Measures of Gains-to-Trade
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Monetary Measures of Gains-to-Trade -Compensating Variation (means that the change in income necessary to restore the consumer to his original indifference curve.) (It measures how much extra money the government would have to give the consumer if it wanted to exactly compensate the consumer for the price change) •O n l y i n o n e s p e c i a l c i r c u m s t a n c e d o t h e s e t h r e e measures coincide- in case of quasilinear utility .
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•S u p p o s e s p r i n g w a t e r c a n b e b o u g h t o n l y i n lumps of one gallon. •U s e 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. •N o w t h a t s h e h a s o n e g a l l o n , u s e r 2 to denote the most she would pay for a 2nd gallon -- this is her reservation price for the 2nd gallon.
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ch14lec - Chapter 14 Consumers Surplus Econ 306 Monetary...

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