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Tsinghua Micro Ch14 021025

Tsinghua Micro Ch14 021025 - Chapter Fourteen Consumers...

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Chapter Fourteen Consumer’s Surplus

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Monetary Measures of Gains-to- Trade You can buy as much rice as you wish at RMB1 per kilogram once you enter the gasoline market. Q: What is the most you would pay to enter the market?
A: You would pay up to the dollar value of the gains-to-trade you would enjoy once in the market. How can such gains-to-trade be measured? Monetary Measures of Gains-to- Trade

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Three such measures are: Consumer’s Surplus Equivalent Variation, and Compensating Variation. Only in one special circumstance do these three measures coincide. Monetary Measures of Gains-to- Trade
Suppose rice can be bought only in lumps of one kilogram. Use r 1 to denote the most a single consumer would pay for a 1st kilogram -- call this her reservation price for the 1st kilogram. r 1 is the dollar equivalent of the marginal utility of the 1st kilogram. \$ Equivalent Utility Gains

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Now that she has one kilogram, use r 2 to denote the most she would pay for a 2nd kilogram -- this is her reservation price for the 2nd kilogram. r 2 is the dollar equivalent of the marginal utility of the 2nd gallon. \$ Equivalent Utility Gains
Generally, if she already has n-1 kilograms of rice then r n denotes the most she will pay for an nth kilogram. r n is the dollar equivalent of the marginal utility of the nth kilogram. \$ Equivalent Utility Gains

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r 1 + … + r n will therefore be the dollar equivalent of the total change to utility from acquiring n kilograms of rice at a price of \$0. So r 1 + … + r n - p G n will be the dollar equivalent of the total change to utility from acquiring n kilograms of rice at a price of \$p G each. \$ Equivalent Utility Gains
A plot of r 1 , r 2 , … , r n , … against n is a reservation-price curve. This is not quite the same as the consumer’s demand curve for rice. \$ Equivalent Utility Gains

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\$ Equivalent Utility Gains Reservation Price Curve for Rice 0 2 4 6 8 10 Rice (kilograms) (\$) Res. Values 1 2 3 4 5 6 r 1 r 2 r 3 r 4 r 5 r 6
What is the monetary value of our consumer’s gain-to-trading in the rice market at a price of \$p G ? \$ Equivalent Utility Gains

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The dollar equivalent net utility gain for the 1st kilogram is \$(r 1 - p G ) and is \$(r 2 - p G ) for the 2nd kilogram, and so on, so the dollar value of the gain-to-trade is \$(r 1 - p G ) + \$(r 2 - p G ) + … for as long as r n - p G > 0.
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Tsinghua Micro Ch14 021025 - Chapter Fourteen Consumers...

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