Microeconomics Consumer Surplus & Demand Theory
Homework Help on Consumer's surplus,Quasi linear utility,Endowments in the budget constraint from our online tutoring experts
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- Endowments in the budget constraint: The standard way to do this is to think of the consumer as having some endowment ω = (ω1, ... , ωk) of various goods which can be sold at the current market prices p. This gives the consumer income m = pw which can be used to purchase other goods. The utility maximization problem becomes
 such that px = pω.
This can be solved by the standard techniques to find a demand function x(p, pω). The net demand for good i is xi - ωi.
- Labor supply: Suppose that a consumer chooses two goods, consumption and labor. She also has some non labor income m. Let v(c, l) be the utility of consumption and labor and write the utility maximization problem as
 Such that pc = ωl +m.
When the economic environment changes a consumer may be made better off or worse off. Economists often want to measure how consumers are affected by changes in the economic environment, and have developed several tools to enable them to do this.
The classical measure of welfare change examined in elementary courses is consumer's surplus. However, consumer's surplus is an exact measure of welfare change only in special circumstances.
- Consumer's surplus:
The classic tool for measuring welfare changes is consumer's surplus. If x(p) is the demand for some good as a function of its price, then the consumer's surplus associated with a price movement from po to p' is
- Quasi linear utility:
Suppose that there exists a monotonic transformation of utility that has the form
U(Xo, Xl, ... ,Xk) = Xo + u(Xl, . .. ,Xk).
The utility function is linear in one of the goods, but (possibly) nonlinear in the other goods. For this reason we call this a quasi linear utility function.
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