MICROECON THEORY ECON 100A
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This 15 page Class Notes was uploaded by Arno Leuschke on Thursday October 22, 2015. The Class Notes belongs to ECON 100A at University of California Santa Barbara taught by Staff in Fall. Since its upload, it has received 16 views. For similar materials see /class/227160/econ-100a-university-of-california-santa-barbara in Economcs at University of California Santa Barbara.
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Date Created: 10/22/15
gamma Sum mg 23de Wnei fam Magrsunmamamit gammy ML mm Martha D l 7 l d Emma 15 m ie Huulraiu m Jnn39ipurili xe Outline o Welfare measures example 0 Welfare effects of interference in competitive markets 0 Market Demand Chapter 14 o Deriving market demand from individual demands a How responsive is qd to a change in price elasticity a What is the relationship between revenue and demand elasticity amiie it glrale in immune Mailer CV amp EV Example Consider a utility function Uc17 Cg 6162 original prices p1 pg 1 and income In 100 Find CV EV when p1 increases to p 1 2 0 Need to find consumption utility before and after Do this by deriving a demand function for each good Solve max 6 6 61m 1 2 subject to p161 i p262 m 0 MRS priceratio MU2 C1 P2 7gt 161 262 MU1 62 P1 p p 0 Substituting back into the budget constraint give us 1 and 2 2P2 2P1 gmme Mimi in minimum Marier CV amp EV Example Consumption amp Utility under before and after the price change 0 pl 1 pg 1 m 100 before 0 c150cz o U50502500 o p 1 2 p 2 1 m 100 after a c253nd c 50 a U25501250 CV the amount of extra money needed to bring the budget line back up to the old indifference curve As WEH an as befure mus CV amp EV Example Compensating Variation 0 How much money to we have to pay the consumer to make her as well off as she was before U 2500 o If income is m then consumption with the new prices is m m 1 2p1 4 m m quot 2 27 7 and utility is U cfc m 0 For what value of m is U U 25007 m 2500 m 50x z 141 So CVm7mz4l Vi Eharmig is m Jnn39uiurill m Equivalent Variation EV how much money we would have to take away from the consumer before the price change to leave herjust as well off as she would be after c2 As Well arr as after CV amp EV Example Equivalent Variation 9 lfwe don39t change the prices how much money would we have to take away from the consumer to bring her utility down an equivalent amount 0 At original prices consumption with income m is 1 2 m7 and utility is then U cfc quot12 0 For what value of m is U U 12507 m Tl250gtm50 z71 SoEVm7mz29 Welfare in Competitive Markets 0 Q How can we measure the gain or loss caused by market interventionregulation o A Use consumer and producer surplus total surplus C5 PS 0 Our benchmark will be competitive free market equilibrium F39HEE Snuggly blankets Welfare in Competitive Markets Any regulation that causes the units from ql to qo to be not traded destroys some of the gains from trade Price This loss is the net cost of regulation Welfare in Competitive Markets Example per unit tax of t Price Welfare in Competitive Markets Example price floor pf Price Welfare in Competitive Markets Example price ceiling pc Price Welfare in Competitive Markets Example rationing only ql units allowed to be traded Price mim m CanwriM Je new Maria Demand From Individual Demands to Market Demand Let Dp be the demand function of person i and suppose that mp max20 a p70 Dgp max1072p0 Price Price 0101 5 17201 20 Cats 10 Cats Demand of Agent 1 Demand of Agent 2
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