VictorBuzz

INTRODUCTION:

In the preceding chapters, we’ve seen the way to derive a consumer’s demand Function from the underlying preferences or utility function. But in pracTice, we are usually concerned with the reverse problem—how to estimate Preferences or utility from observed demand behavior. We have already examined this problem in two other contexts. we showed how one could estimate the parameters of a utility function From observing demand behavior. within the Cobb-Douglas example utilized in That chapter, we were ready to estimate a utility function that described The observed choice behavior just by calculating the typical expendiTure share of every good. The resulting utility function could then be wont to evaluate changes in consumption.

DEMAND FOR DISCRETE GOODS:

Let us start by reviewing demand for a discrete good with quasilinear utility. Suppose that the utility function takes the shape v(x) +y which the x-good is merely available in integer amounts. Let us consider they are good as money to be spent on other goods and set its price to 1. Let p be the worth of the x-good. We saw in Chapter 6 that during this case consumer behavior is often described in terms of the reservation prices than on. the connection between reservation prices and demand was very simple: if n units of the discrete good are demanded, then To verify this, let’s check out an example. Suppose that the buyer chooses to consume 6 units of the x-good when its price is p. Then the utility of consuming (6, m − 6p) must be a minimum of as large because the utility of consuming the other bundle (x, m This argument shows that if 6 units of the x-good are demanded, then the worth of the x-good must lie between r6 and r7. generally, if n units of the x-good are demanded at price p, then rn ≥ p ≥ rn+1, as we wanted to point out. The list of reservation prices contains all the knowledge necessary to explain the demand behavior. The graph of the reservation prices forms a “staircase”.

CONSTRUCTING UTILITY FROM DEMAND:

We have just seen the way to construct the demand curve given the reservation Prices or the utility function. But we will also do an equivalent operation in Reverse. If we are given the demand curve, we will construct the utility Function—at least within the special case of quasilinear utility. At one level, this is often just a trivial operation of arithmetic. The reservation prices are defined to be the difference in utility:

If we would like to calculate v(3), for instance, we simply add up each side of this list of equations to seek out

R1 + R2 + R3 = V(3) – V(0).

It is convenient to line the utility from consuming zero units of the great adequate to zero, in order that v(0) = 0.

FROM CONSUMER’S SUPPLY TO CONSUMER SURPLUS :

Up so far we’ve been considering the case of one consumer. If several consumers are involved we will add up each consumer’s surplus across All the consumers to make an aggregate measure of the consumers’ surPlus. Note carefully the excellence between the 2 concepts: consumer’s Surplus refers to the excess of one consumer; consumers’ surplus refers To the sum of the surpluses across a variety of consumers. Consumers’ surplus is a convenient measure of the mixture gains From trade, even as consumer surplus is a measure of the individual Gains from trade.

INTERPRETING CHANGE IN CONSUMER SURPLUS:

We are usually not terribly curious about absolutely the level of consumer Surplus. We are generally more curious about the change in consumer surplus that results from some about-face. for instance, suppose the worth of an honest changes from p to p How does the consumer’s surplus change? the change in consumer surplus as associated with a change in price. The change in consumer’s surplus is that the Difference between the roughly triangular regions and can therefore have a trapezoidal shape.