9.22 Consumer Theory - Lecture 10

# 9.22 Consumer Theory - Lecture 10 - Consumer Theory(Part 8...

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Unformatted text preview: Consumer Theory (Part 8) Consumer Theory Review Continued ... Price Indices A note on WARP Consumer Theory (Part 8) September 22, 2011 Consumer Theory (Part 8) Consumer Theory Review Continued ... Price Indices A note on WARP Welfare Metrics De&nition The Compensating Variation is de&ned as CV = e ( p , u ) & e ( p , u ) where u = v ( p , w ) If the agent is given a ¡at transfer of wealth equal to & CV, then he can buy a bundle that holds his utility constant as p ! p CV > 0 is good Consumer Theory (Part 8) Consumer Theory Review Continued ... Price Indices A note on WARP Welfare Metrics De&nition The Equivalent Variation is de&ned as EV = e ( p , u ) & e ( p , u ) where u = v ( p , w ) If the agent is given a ¡at transfer of wealth equal to & 1 ¡ EV, then he is just as well o/ under p as he would be without a transfer under p EV > 0 is good Consumer Theory (Part 8) Consumer Theory Review Continued ... Price Indices A note on WARP Shepard&s Lemma Let&s turn variations into integrals CV = Z C h ( s , u ) & ds , u = v ( p , w ) (1) EV = Z C h ( s , u ) & ds , u = v ( p , w ) (2) Consumer Theory (Part 8) Consumer Theory Review Continued ... Price Indices A note on WARP Consumer Surplus What if we don&t have the Hicksian? CS = Z C x ( s , w ) & ds min f CV . EV g ¡ CS ¡ max f EV , CV g Consumer Theory (Part 8) Consumer Theory Review Continued ... Price Indices A note on WARP Consumer Surplus Suppose EV < CV ....
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9.22 Consumer Theory - Lecture 10 - Consumer Theory(Part 8...

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