Chapter Fourteen Consumers Surplus
Chapter Fourteen Consumer’s Surplus
Monetary Measures of Gains-to T rade 4 You can buy as much rice as you wish at RMB1 per kilogram once you enter the gasoline market .Q: What is the most you would pay to enter the market?
Monetary Measures of Gains-toTrade ◆You can buy as much rice as you wish at RMB1 per kilogram once you enter the gasoline market. ◆Q: What is the most you would pay to enter the market?
Monetary measures of Gains-to Trade A: You would pay up to the dollar value of the gains-to-trade you would enjoy once in the market How can such gains-to-trade be measured?
◆A: You would pay up to the dollar value of the gains-to-trade you would enjoy once in the market. ◆How can such gains-to-trade be measured? Monetary Measures of Gains-toTrade
Monetary measures of Gains-to Trade e Three such measures are: ● Consumer' s Surp|us EQuivalent Variation, and O Compensating Variation Only in one special circumstance do these three measures coincide
◆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 Gains-toTrade
S Equivalent Utility gains Suppose rice can be bought only in lumps of one kilogram o Use r, to denote the most a single consumer would pay for a 1st kilogram -call this her reservation price for the 1st kilogram .r, is the dollar equivalent of the marginal utility of the 1st kilogram
◆Suppose rice can be bought only in lumps of one kilogram. ◆Use r1 to denote the most a single consumer would pay for a 1st kilogram -- call this her reservation price for the 1st kilogram. ◆r1 is the dollar equivalent of the marginal utility of the 1st kilogram. $ Equivalent Utility Gains
S Equivalent Utility gains Now that she has one kilogram, use r2 to denote the most she would pay for a 2nd kilogram -this is her reservation price for the 2nd kilogram +r2 is the dollar equivalent of the marginal utility of the 2nd gallon
◆Now that she has one kilogram, use r2 to denote the most she would pay for a 2nd kilogram -- this is her reservation price for the 2nd kilogram. ◆r2 is the dollar equivalent of the marginal utility of the 2nd gallon. $ Equivalent Utility Gains
S Equivalent Utility gains Generally, if she already has n-1 kilograms of rice then rn denotes the most she will pay for an nth kilogram +rn is the dollar equivalent of the marginal utility of the nth kilogram
◆Generally, if she already has n-1 kilograms of rice then rn denotes the most she will pay for an nth kilogram. ◆rn is the dollar equivalent of the marginal utility of the nth kilogram. $ Equivalent Utility Gains
S Equivalent Utility gains ◆r1+∴+ r will therefore be the dollar equivalent of the total change to utility from acquiring n kilograms of rice at a price of $o ◆Sor1+∴+ pgn will be the dollar equivalent of the total change to utility from acquiring n kilograms of rice at a price of $p each
◆r1 + … + rn will therefore be the dollar equivalent of the total change to utility from acquiring n kilograms of rice at a price of $0. ◆So r1 + … + rn - pGn will be the dollar equivalent of the total change to utility from acquiring n kilograms of rice at a price of $pG each. $ Equivalent Utility Gains
S Equivalent Utility gains ◆ A plot of r1r2…,『n… against n is a reservation-price curve. This is not quite the same as the consumer's demand curve for rice
◆A plot of r1 , r2 , … , rn , … against n is a reservation-price curve. This is not quite the same as the consumer’s demand curve for rice. $ Equivalent Utility Gains
S E quivalent Utility g Jains S)Res Reservation Price Curve for rice Values 5 6 6 Rice( kilograms)
$ Equivalent Utility Gains Reservation Price Curve for Rice 0 2 4 6 8 10 Rice (kilograms) ($) Res. Values 1 2 3 4 5 6 r1 r2 r3 r4 r5 r6