Now lost consumer surplus because pizza has become

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now lost consumer surplus because pizza has become unavailable. To use expenditure function to mea- sure consumer surplus, think about the sit- uation when pizza is unavailable as a situ- ation when p 1 = . How much money do we need to give you after pizza has disap- peared in order for you to be on the same indifference curve as you were when you were consuming pizza? Answer: E ( , ..., p n , ¯ u ). Thus, ‘Consumer surplus’ from good 1 at price p 1 can be measured as follows: CS (1) = E ( , ..., p n , ¯ u ) - E ( p 1 , ..., p n , ¯ u ) where E ( p 1 , ..., p n , ¯ u ) = I (original income). 10
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Consider a change in the consumer surplus as a result of price increase of good 1 from ˆ p 1 to ˆ p 0 1 . We sometime call it wel- fare loss (gain). Δ CS (1) = E p 1 , ..., ¯ u ) - E p 0 1 , ..., p n , ¯ u ) where E p 1 , ..., ¯ u ) = I -the original income. 12
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  • Fall '08
  • CHAPPLE
  • pn, p1, Expenditure minimization problem

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