Lecture8 - Professor Jay Bhattacharya Spring 2001 Motivation for Welfare Analysis In the last class we found that the Consumer Price Index(CPI

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
Professor Jay Bhattacharya Spring 2001 Econ 11--Lecture 8 1 Spring 2001 Econ 11--Lecture 8 1 Motivation for Welfare Analysis • In the last class, we found that the Consumer Price Index (CPI) overstates a “true” cost-of-living. without defining a “true” cost-of-living index. • Suppose, Initial situation: New situation: 0 0 0 , x I p H H Þ Is the consumer better off? 1 1 1 , x I p H H Þ Spring 2001 Econ 11--Lecture 8 2 • Is the consumer better off? – To answer this question, we need to make use of our utility framework. – Given both old and new prices and income, we can calculate the consumer’s demand for goods. – Then we plug these back into the consumer’s utility function (deriving the indirect utility function) and compare. – But utility is an ordinal measure, we want a cardinal measure so that we can know how much better (or worse) off the consumer is. – We want a “monetary” value of welfare. Spring 2001 Econ 11--Lecture 8 3 Three measures of the change in welfare • Compensating Variation (CV) • Equivalent Variation (EV) • Change in Consumer Surplus ( CS) Spring 2001 Econ 11--Lecture 8 4 Compensating Variation in Income (CV) • Given a price change from p 0 to p * what is the minimum income needed to get to the original level of utility, U 0 , at the new prices p * ? • “HowmuchmustIcompensateyoutomake you as well off as you were before the price change?” Spring 2001 Econ 11--Lecture 8 5 Compensating Variation in Income (CV) I 0 /P 2 X 2 X 1 Original budget constraint. Original Utility Level Budget constraint after price change. Budget constraint after utility is restored to the original level.
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 02/11/2012 for the course ECON 51 taught by Professor Tendall,m during the Fall '07 term at Stanford.

Page1 / 4

Lecture8 - Professor Jay Bhattacharya Spring 2001 Motivation for Welfare Analysis In the last class we found that the Consumer Price Index(CPI

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online