CHAPTER 10: CONSUMER SURPLUS + DWL

Question 1

Increase in utility

Answer 1

Consumer is better off

Question 2

Measure utility using

Answer 2

Indirect utility functions, showing max utiltiy at any given price + income level

Question 3

Indirect utility function (maximisation)

Answer 3

Put demand functions with utility

V(p1,p2,I) = u(x1(p1,p2,I), x2….))

Question 4

Cobb Douglas x1 (p1,p2,I) and x1

Answer 4

X1 = alpha income / p1

X2 = (1- alpha) income / p2

Question 5

Initial budget

Answer 5

P1^0, p2, I

Question 6

New budget

Answer 6

P,’, p2, i

Question 7

Change in v =

Answer 7

New budget - initial budget

Question 8

Change in v > 0

Answer 8

New budget is better, increased utility

Question 9

For substitution effects use

Answer 9

Expenditure minimisation

Question 10

Minimisation equation

Answer 10

Min p1x1 + p2x2 s.t u=u(x1,x2)
Compensated demand functions:
X1 = h1(p1,p2,u)
X2 = h2(p1,p2,u)
Expenditure function: e(p1,p2,u) =
P1h1(p1,p2,u) + p2h2(p1,p2,u)

Question 11

Expenditure neede to reach u^0 at prices

Answer 11

(P1^0, p2)
Function E(p1^0, p2, u^0)

Question 12

Cv > 0

Answer 12

Price increase

Question 13

Cv =

Answer 13

The area under the compensated demand curve between the two prices

Question 14

When y axis is a composite good

Answer 14

MRS = MWTP

Question 15

MWTP

Answer 15

How much each unit of a good is values given we are consuming at some bundles A

Question 16

TWTP

Answer 16

For all q^a units is the sum of all the MWTP for all the units consumed (under the MWTP curve)

Question 17

Cs + total paid.

Answer 17

TWTP

Question 18

Additional income effect for a normal good makes the

Answer 18

Uncompensated curve shallower than the compensated curve

Question 19

If x1 was quasilinear, the income effect would

Answer 19

Disappear. So compensated and uncompensated curves would coincide.

Question 20

Demand curve only measure cs correctly if

Answer 20

Preferences are quasilinear

Question 21

Taxes distort choices by

Answer 21

Changing relative price leading customers to avoid taxed goods in favour of less preferred untaxed ones, creating DWL

Question 22

DWL when

Answer 22

No tax revenue is collected, consumers are worse off. The creator the substitutability between goods, the larger the loss

Question 23

Dwl from tax =

Answer 23

Diff between tax rev raises and tax rev that could have been raised wo making anyone worse of

Question 24

DWL arising from tax solely arises from which effect
And what does it not emerge at all with

Answer 24

Substitution.
Perfect complements

Question 25

Normal good Inferior good Quasilinear good

Answer 25

Overestimated dwl Underestimated dwl Correctly estimated dwl

Question 26

For a k fold increase in tax rates, dwl increases

Answer 26

K^2 fold So we recommend low rates on large tax bases

Question 27

T = L =

Answer 27

Tax revenue from a distortionary per-unit tax paid by a customer of output x1 The lump sum revenue from a non-distorionary tax that makes the consumer just as well off

Question 28

After tax price

Answer 28

P1 + t

Question 29

T equation

Answer 29

Tx1(p1+t,p2+t)

Question 30

Utility level under distorionary tax

Answer 30

V(p1+t,p2,i)

Question 31

Expenditure necessary to reach utility level at the undistored price p1

Answer 31

E P1, P2, V(p1+t, p2, I)

Question 32

L equation

Answer 32

I - E(p1,p2,V(p1+t,p2,I)

Question 33

DWL equation

Answer 33

L - T