Lesson 9

Question 1

What is Consumer Surplus?

Answer 1

The difference between what a consumer is willing to pay for a good and what they actually pay. It measures the net benefit to the consumer.

Question 2

How is Consumer Surplus represented for a Discrete Good?

Answer 2

It is the sum of the differences between the willingness to pay (reservation price) and the market price for each unit consumed.

Question 3

How is Consumer Surplus represented for a Continuous Good?

Answer 3

It is the area under the demand curve and above the market price, from zero to the quantity consumed.

Question 4

What is the formula for the Change in Consumer Surplus when the price changes?

Answer 4

ΔCS=R+TΔCS=R+T, where R and T are areas on the graph.

Question 5

What geometric shape is often used to approximate the change in consumer surplus?

Answer 5

A trapezoid.

Question 6

What is the formula for the area of a trapezoid?

Answer 6

(a+b)h22(a+b)h​, where ‘a’ and ‘b’ are the lengths of the two parallel sides and ‘h’ is the height.

Question 7

What is Producer Surplus?

Answer 7

The difference between the market price a producer receives and their marginal cost of production. It measures the net benefit to the producer.

Question 8

What are the two main monetary measures of the change in a consumer’s welfare due to a price change?

Answer 8

Compensating Variation (CV) and Equivalent Variation (EV).

Question 9

What is Compensating Variation (CV)?

Answer 9

The amount of money that must be taken from a consumer after a price change to restore them to their original (pre-change) level of utility.

Question 10

How is the Compensating Variation related to the Hicksian demand curve?

Answer 10

It is similar to the Hicksian substitution effect; it uses the new prices and adjusts income to reach the original utility level.

Question 11

What is Equivalent Variation (EV)?

Answer 11

The amount of money that must be given to a consumer before a price change to make them as well off as they would be after the price change.

Question 12

How is the Equivalent Variation related to the Hicksian demand curve?

Answer 12

It uses the original prices and adjusts income to reach the new utility level.

Question 13

For a price decrease, how do you find the Compensating Variation (CV) on a graph?

Answer 13

You shift the new budget line inward until it is tangent to the original indifference curve. The change in the intercept of this budget line is the CV.

Question 14

For a price decrease, how do you find the Equivalent Variation (EV) on a graph?

Answer 14

You shift the original budget line outward until it is tangent to the new indifference curve. The change in the intercept of this budget line is the EV.

Question 15

What is the key difference between CV and EV in terms of the reference utility level?

Answer 15

CV uses the original utility as the reference point. EV uses the new utility as the reference point.