Chapter 5 Flashcards
Consumer welfare: expenditure function, effects of government policies
What is willingness to pay?
How much you are willing to pay for a good
What is consumer surplus?
Extra value you get after paying for your desired amount of a good at a particular price
What does a tax do to consumer surplus?
It decreases the amount of surplus consumers get
Why is consumer surplus not a good measurement of welfare?
since consumer surplus uses the uncompensated demand curve, demand changes due to both the income and substitution effect
Does the compensation variation use old or new utility?
old utility
What does the compensation variation tell you?
It tells you how many dollars you need to exactly compensate you for the price of pizzas increasing
What does the equivalent variation tell you?
the number of dollars that is equivalent to the price change
Does the equivalent variation use new or old utility?
new utility
What are the three methods of measuring welfare?
- Change in consumer surplus
- Compensation variation
- Equivalent variation
Which of the three welfare measures is bigger with normal goods?
|CV| > |△CS| > |EV|
Which of the three welfare measures is bigger with inferior goods?
|CV| < |△CS| < |EV|
In which two markets is consumer surplus loss large?
- The more money is spent on a good
- The less elastic demand is
What two government policies have an effect on consumer welfare?
- Quotas
- Subsidies
What is a quota?
A limit on the amount of a good a person can purchase
When doesn’t a quota make you worse off?
When you were planning to purchase less than or equal to the quota
What is a subsidy?
An amount a government will pay to assist consumers/suppliers to make a good more accessible
