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Unformatted text preview: Chapter Fourteen Consumer’s Surplus Monetary Measures of Gainsto Trade You can buy as much gasoline as you wish at $1 per gallon 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 gainstotrade you would enjoy once in the market. How can such gainstotrade be measured? Monetary Measures of Gainsto Trade 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 Gainsto Trade Suppose gasoline can be bought only in lumps of one gallon. Use 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. $ Equivalent Utility Gains Now that she has one gallon, use r 2 to denote the most she would pay for a 2nd gallon  this is her reservation price for the 2nd gallon. r 2 is the dollar equivalent of the marginal utility of the 2nd gallon. $ Equivalent Utility Gains Generally, if she already has n1 gallons of gasoline then r n denotes the most she will pay for an nth gallon. r n is the dollar equivalent of the marginal utility of the nth gallon. $ Equivalent Utility Gains r 1 + … + r n will therefore be the dollar equivalent of the total change to utility from acquiring n gallons of gasoline 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 gallons of gasoline at a price of $p G each. $ Equivalent Utility Gains A plot of r 1 , r 2 , … , r n , … against n is a reservationprice curve. This is not quite the same as the consumer’s demand curve for gasoline. $ Equivalent Utility Gains $ Equivalent Utility Gains Reservation Price Curve for Gasoline 2 4 6 8 10 Gasoline (gallons) ($) 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 gaintotrading in the gasoline market at a price of $p G ? $ Equivalent Utility Gains The dollar equivalent net utility gain for the 1st gallon is $(r 1 p G ) and is $(r 2 p G ) for the 2nd gallon, and so on, so the dollar value of the gaintotrade is $(r 1 p G ) + $(r 2 p G ) + … for as long as r n p G > 0. $ Equivalent Utility Gains $ Equivalent Utility Gains Reservation Price Curve for Gasoline 2 4 6 8 10 Gasoline (gallons) ($) Res. Values 1 2 3 4 5 6 r 1 r 2 r 3 r 4 r 5 r 6 p G $ Equivalent Utility Gains Reservation Price Curve for Gasoline 2 4 6 8 10 Gasoline (gallons) ($) Res....
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This note was uploaded on 01/23/2012 for the course ECON BMGT360 taught by Professor Spina during the Spring '09 term at Maryland.
 Spring '09
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