ECON 2310 Chapter Notes - Chapter 6: Giffen Good, Economic Surplus

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mauvecaribou445

5 Dec 2013

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Uncompensated price change- consists of a price change with no change in income. Compensated price change- consists of a price change and an income change which leave the consumer"s wellbeing unaffected. Substitution effect of a price change- the effect on consumption of a compensated price change. Income effect of a price change- the effect on consumption of removing compensation after creating a compensated price change. Law of demand- states that demand curves usually slope downward. Giffen good- a product is called a giffen good if the amount purchased increases as the price rises. Compensating variation- the amount of money that exactly compensates the consumer for a change in circumstances. Consumer surplus- the net benefit a consumer receives from participating in the market for some good. Cost of living index- measures the relative cost of achieving a fixed standard of living in different situations. Nominal income- the amount of money actually received in a particular period.

Related Questions

Respond True or False to the following, and explain why each answer is True or False:

a. If two goods x and y are perfect complements, then if the price of x falls, the entire change in demand for x is due to the income effect.

b. A consumer has the utility function given by U=min{x1,2x2}. If good 2, has a price of zero, the consumer will always strictly prefer more of good 2 to less.

c. Ivan spends his entire income on two goods. One of them is a Giffen good. If the price of the Giffen good rises, demand for the other good must fall.

d. Jimmy's utility function is U(a,b) = ab, where a is his consumption of apples and b is his consumption of bananas. If prices and income change in such a way that Jimmy's old consumption bundle lies on his new budget line, then Jimmy will not change his consumption bundle.

blueantelope865

Suppose that a consumer's utility is described by the following function: U(x,y) = x²y, where x is the amount of good X that the consumer consumes, and y is the amount of good Y that the consumer consumes. Consumer's income is 360 euros. Suppose that the price per unit of good X is currently 6 euros and the price per unit of good Y is currently also 6 euros. Suppose that the Government is planning to introduce a tax per unit of good Y, which will result in an increase of the price of good Y from 6 euros to 12 euros (for the consumer). Suppose that the price of good X will not change.

Find the minimum compensation (compensating variation), which Government should pay to the consumer (in case of such policy) if it wants to maintain the consumer's well-being at the pre-policy level.

ivoryjellyfish241

ECON 2310 Chapter Notes - Chapter 6: Giffen Good, Economic Surplus

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