Chapter 14 Varian

Question 1

In the case of a discrete good with quasilinear utility, the utility associated with the consumption of n units of the discrete good is jus the sum of _____

Answer 1

the first n reservation prices

Question 2

How do you calculate consumer surplus?

Answer 2

• Add the first n reservation prices to find the gross benefit of consuming the good.
• Subtract the amount spent on the purchase of the good.

Question 3

What shape roughly approximates the change in consumer’s surplus associated with a price change?

Answer 3

Trapezoid

Question 4

How does one measure the monetary impact of a price change?

Answer 4

• Compensating variation
• Equivalent variation in income

Question 5

If utility and quasilinear, what is the relationship between compensating variation, equivalent variation, and the change in the consumer’s surplus?

Answer 5

They are all equal.

Question 6

What is the consumer’s gross benefit?

Answer 6

For consuming n units of the discrete good, the area of the first n bars which make up the demand function.

Question 7

What is the net consumer’s surplus?

Answer 7

• v(n) - pn
• It measures the net benefits from consuming n units of the discrete good; the utility v(n) minus the reduction in the expenditure on consumption of the other good.

Question 8

How does one find consumers’ surplus (aggregate)?

Answer 8

Add up the consumers’ individual surpluses.

Question 10

Given a graph of ∆ in consumer surplus given a change in price, what does the rectangle R signify?

Answer 10

R = loss in surplus due to the conusmer paying more for all the units he continues to consume

Question 11

Given a graph of ∆ in consumer surplus given a change in price, what does the triangle T signify?

Answer 11

T = loss from reduced consumption

T = the value of the lost consumption of the x-good, since the consumer has decided to consume less of it

Question 12

What is the compensating variation?

Answer 12

the change in income necessary to restore the consumer to his original indifference curve

Question 13

What is the equivalent variation?

Answer 13

This is how much money the government would have to take away before the price change to leave him as well off as he would be after the price change

Question 14

What is the net producer’s surplus?

Answer 14

• The difference between the minimum amount she would be willing to sell the x* units for and the amount she actualy sells the units for
• The triangular area

Question 16

Why is there a kink in the sum of two linear demand curves (i.e., the market demand curve)?

Answer 16

Each demand curve is only linear for positive quantities.

Question 17

What is an adjustment on the intensive margin?

Answer 17

When a price changes, the consumer decides to consume more or less of one good or the other, but still ends up consuming some of both goods.

Question 18

What are adjustments on the extensive margin?

Answer 18

Consumers are deciding whether or not to enter the market for one of the goods.

Question 19

What is the definition of elastiticy in symbols?

Answer 19