Question 1

The compensation variation and equivalent variation will be closer to each other when

Accepted Answer

The answer of The compensation variation and equivalent variation will...

Question 2

Ralf's uncompensated demand function for shoes is given by Q = 100/p.What is the change in consumer surplus when the price of shoes rises from p = 20 to p = 25?

Accepted Answer

The answer of Ralf's uncompensated demand function for shoes is...

Question 3

Ann and Bill each spend $30 per month on cigarettes when the price is $1 per pack.Draw a graph to illustrate that the consumer with the less elastic demand will suffer the greater loss of consumer surplus when the price of cigarettes increases.Explain and label the figure.

Accepted Answer

The answer of Ann and Bill each spend $30 per...

Question 4

Ed's utility from vacations (V)and meals (M)is given by the function U(V,M)= V²M.Last year,the price of vacations was $200 and the price of meals was $50.This year,the price of meals rose to $75,the price of vacations remained the same.Both years,Ed had an income of $1500. a.Calculate the change in consumer surplus from meals resulting from the change in meal prices. b.What is the compensating variation for the price change in meals? c.Calculate the equivalent variation for the price change in meals.

Accepted Answer

The answer of Ed's utility from vacations (V)and meals (M)is...

Question 5

The change in total welfare from a 10% increase in price will depend only on the elasticity of demand.

Accepted Answer

The effect of a price change also depends on revenue changes.

Question 6

Suppose an analyst attempts to estimate a consumer's willingness to pay for a policy that lowers the price of childcare by measuring the amount of income that can be taken away from the consumer (at the new price)such that they can just afford their original bundle of goods.Is this correct? If not,is it more or less than the true compensating variation? Explain with a graph.

Accepted Answer

The answer of Suppose an analyst attempts to estimate a...

Question 7

Kisa consumes the same amount of cigarettes each week regardless of her income (assume that her income is sufficiently large such that the quantity is affordable).The Equivalent Variation equals the Compensating Variation.

Accepted Answer

The difference between the measures lies with the income effect/elasticity.There is no income effect for Kisa therefore the measures will be the same.

Question 8

Suppose an analyst attempts to estimate a consumer's willingness to pay for a policy that lowers the price of childcare.The willingness to pay should be measured as

Accepted Answer

The answer of Suppose an analyst attempts to estimate a...

Question 9

Ted's uncompensated demand function for bacon is given by Q = 15/p.What is Ted's change in consumer surplus when the price of bacon rises from p = 3 to p = 5?

Accepted Answer

The answer of Ted's uncompensated demand function for bacon is...

Question 10

Ian views playing Wartcraft and drinking soda as perfect complements (one soda with one hour of playing Wartcraft).Currently,sodas are $1 each and Wartcraft costs $1 per hour.Ian has $12 of income.
a.Compute Ian's Compensating Variation if the price of Wartcraft rises to $2.
b.Compute Ian's Equivalent Variation if the price of Wartcraft rises to $2.
c.Compute Ian's change in Consumer Surplus if the price of Wartcraft rises to $2.

Accepted Answer

The answer of Ian views playing Wartcraft and drinking soda...

Question 11

The equivalent variation is always less than the consumer's income

Accepted Answer

The amount a person will pay to prevent a price change (EV)cannot exceed their available income.

Question 12

The difference between the equivalent variation and compensating variation is greater for goods with large income elasticities.

Accepted Answer

According to the Slutsky equation,the difference between the compensated demand and uncompensated demand elasticity is given by the product of budget share and income elasticity.For larger income elasticities,the difference between these measures will also be larger.

Question 13

Consumers who are more sensitive to changes in price suffer a greater loss of consumer surplus from any given price increase.

Accepted Answer

Consumers who are more sensitive to the price increase will reduce their purchase of the good by a greater extent than those who are not price sensitive.As a result,they incur a smaller loss of consumer surplus.

Question 14

-The above figure shows an individual's demand curve for time per month spent telecommunicating while driving (talking on the car phone. )A car phone is useless except for talking with somebody who is not in the car.If calls are priced at ten cents per minute,what is the consumer surplus derived from talking? What is the most this person would pay for the car phone? Explain.

Accepted Answer

The answer of 
-The above figure shows an individual's demand...

Question 15

Jeremy derives all of his utility from consuming milk shakes;he devotes his entire $20 allowance to milk shakes each week.Suppose the price of milk shakes rise from $2 to $4.Compute Jeremy's Compensating Variation and Equivalent Variation.

Accepted Answer

The answer of Jeremy derives all of his utility from...

Question 16

The Compensating Variation for an increase in the price of a good is

Accepted Answer

The compensating variation is the minimum amount of money a consumer would require to be compensated so that they would be indifferent between the two scenarios - before the price increase and after the price increase. In other words, it measures the amount of income that must be given to the consumer to make them equally as well off as they were before the price increase. Therefore, the correct option is A, which states that it is the minimum amount of money a consumer would accept to voluntarily accept the price increase.

Question 17

The Equivalent Variation for an increase in the price of a good is

Accepted Answer

The answer of The Equivalent Variation for an increase in...

Question 18

Suppose a victim of an accident brings the injurer to court.You are hired to determine the amount of damages.You are specifically asked to find a measure of the amount of money needed to restore the victim to the position he was in prior to the accident.What welfare measure will provide the most accurate measure of this amount?

Accepted Answer

Compensating variation is the most accurate measure for determining the amount of money needed to restore the victim to the position they were in prior to the accident. It calculates the amount of compensation required to offset the harm or loss experienced, thereby returning the victim to their original level of utility or welfare.

Question 19

Consumer surplus from a given purchase is the difference between what one was willing to pay for that purchase and what was actually paid.

Accepted Answer

This is the definition of consumer surplus.

Question 20

Suppose you work for a government agency that is considering removing certain agricultural subsidies.The removal of these subsidies will increase the price,thus lowering consumers' welfare.Because only aggregate market data is available,you are unable to measure the exact values for the compensated and equivalent variation by consumer.However,you are able to estimate the change in market consumer surplus.Assuming agricultural products are normal goods,how does your estimate of consumer surplus compare to the unknown EV and CV? Explain.Under what conditions will the three measures of welfare be close to one another?

Accepted Answer

The answer of Suppose you work for a government agency...

Quiz 5: Consumer Welfare and Policy Analysis