what are three measures to see changes in welfare? - ANSWER --
changes in consumer surplus
- compensating variation
- equivalent variation
when are all three measures of welfare change equal? - ANSWER
quasilinear utility
what is reservation price? - ANSWER -- price at which you are
indifferent between buying and not buying
- is a dollar measure of marginal utility
- use r1 to denote the most a single consumer would pay for the 1st
unit of something
what is a surplus? - ANSWER -- reservation prices are typically used
to estimate the most that someone would pay for one unit when they
can only buy one unit
- if a consumer pays less for something than their reservation price,
then the consumer has gotten a surplus
,what is consumer surplus? - ANSWER -- an ordinary demand curve
describes the most thats would be paid for q units of a commodity
purchased simultaneously at the same price
- consumer surplus measures in dollars the value to a consumer for
being able to purchase all the units they want at a going price p
what is the consumer surplus on a graph? - ANSWER -- the area
under the ordinary demand curve, above the price, up to the quantity
purchased in the consumer's surplus
- the consumer surplus measures the most a consumer would pay to
enter the market and buy units at the going price
is change in consumer surplus for quasilinear goods an accurate
measure of change in utility? - ANSWER -- if the consumer's utility
function is quasilinear (linear in money) and the consumer is rich
enough, then there are no income effects on the nonlinear good - in
that case change in consumer surplus is an exact dollar measure of
the change in utility from purchasing the good
what is compensating variation? - ANSWER -- p1 rises
- what is the least extra income that, at the new prices, just restores
the consumer's original utility level
- the compensating variation is the amount of money you have to give
to the consumer after the price rise to compensate them for the price
increase - CV = m2 - m1
,what is the equivalent variation? - ANSWER -- p1 rises
- what is the least extra income that, at the original prices, just leaves
the consumer at the new utility level
- the equivalent variation is the money loss a consumer would
consider to be equivalent to the price increase (the amount of money
a consumer would pay to avoid the price increase)
- EV = m1 - m2 (difference in income levels at different optimums)
what is special about the compensating and equivalent variations for
perfect complements? - ANSWER -for perfect complements,
compensating and equivalent variations will result in the same
optimal bundle
when a consumer has quasilinear utility (linear in good 2) and p1
rises, then... - ANSWER -change in utility = CV = EV = change in
consumer surplus
what is producer surplus? - ANSWER -changes in a firms welfare
measured in dollars
what is marginal cost? - ANSWER -rate of change of total cost
what is the variable cost of producing y' units? - ANSWER -variable
cost of producing y' units is the sum of the marginal costs
, how do you calculate producer surplus? - ANSWER -revenue minus
variable cost = producer surplus
can we measure in money units the neg gain or loss caused by a
market intervention? - ANSWER -yes, by using measures such as the
consumer's surplus and producer's surplus
what is the market demand function when all consumers are price
takers? - ANSWER -- the market demand is the sum of quantities
demanded by each consumer at every price
- the market demand curve is the "horizontal sum" of the individual
consumer's demand curves
how do we model choke prices on graphs? - ANSWER -when a
consumer doesn't demand anything if the price is above p1", p1" is
referred to as the choke price -- the point where demand is choked off
what are the applications of elasticity? - ANSWER -- quantity
demanded of commodity i with respect to the price of commodity i
(own price elasticity of demand)
- demand for commodity i with respect to the price of commodity j
(cross price elasticity of demand)
- demand for commodity i with respect to income (income elasticity of
demand)
- quantity supplied of commodity i with respect to the price of
commodity i (own price elasticity of supply)
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