11

Varian has a paper on Price Discrimination and Social Welfare in which he gives some necessary and sufficient conditions for (third degree) price discrimination to increase welfare. A necessary condition is that the total level of output (i.e. the total number of consumers served) increases as a result of the discrimination. A sufficient condition is that ...


9

Price discrimination is generally welfare ambiguous. Basic example: A monopoly can price discriminate between two market segments. In segment A, there is one consumer with a willingness to pay of $\$1$ million and there are one million consumers with a willingness to pay of $\$1$. In segment B, there is one consumer willing to pay $\$1$ million and 400,000 ...


7

From a purely theoretical perspective, if an individual's demand curve is perfectly inelastic, then her willingness to pay for the good is infinite. NB this also implies that she has an infinite budget. Thus, consumer surplus is well defined: it is the willingness to pay minus the price she pays, so as long as the price is finite her consumer surplus is ...


6

It is better to think of it as a "saving" rather than as a"surplus". Also, it is better understood if we imagine heterogeneous consumers for whom a threshold price exists, a "maximum willingness to pay". Then at a given price level, some consumers are willing to buy the product and are expressing their demand for the product, while others are out of the ...


6

TL;DR version: "the tunnel" and D+A+B have exactly the same area. You are right to say that post-subsidy producer surplus is equal to the blue area in the following figure: However, it turns out that The Tunnel (i.e. the dark blue area) is exactly equal in size to D+A+B. Intuitively, there are two ways to think of a unit subsidy: Paying the seller a ...


5

Let $Q^d = D(p)$ be the market demand function, depending on price $p$. Let $p^*$ be equilibrium price (that depends also on supply of course). Then Consumer Surplus is usually defined as $$\text{CS}=\int_{p^*}^\infty\!D(p)\,dp$$ i.e. the "area under the demand curve", starting from equilibrium price. So it appears, that if $D(p) =\bar q>0$ (perfectly ...


5

We have that $$D(p^*,\mathbf{a}) = -\frac {d}{dp^*}\int_{p^*}^\infty\!D(p;\mathbf{a})\,dp,$$ $$\Rightarrow \text{PS}(p^*) = -\text{CS}'(p^*)p^* \tag{1}$$ So $$\text{PS}(p^*)= \text{CS}(p^*) \Rightarrow -\text{CS}'(p^*)p^* = \text{CS}(p^*)$$ or $$\text{CS}'(p^*) + \frac 1{p^*}\text{CS}(p^*)=0 \tag{2}$$ which is a first-order linear homogeneous ...


5

Your calculation is correct. We can doublecheck your work with a graphical approach. As shown in the figure below, $CS$ at some arbitrary and not necessarily equilibrium price $p_0$ is the gray-shaded area. If we take the non-integral approach, we get \begin{equation} CS=\frac12\left(\frac{A}a-p_0\right)D(p_0)=\frac12\left(\frac{A}a-p_0\right)(A-ap_0)=\frac{(...


4

There is a large economic literature on intellectual property rights. However, the issue seems far from settled on what even the optimal duration for patents are. Note that open source is even a step further than a 0 day patent duration. A strong case for your view would probably be found in Boldrin/Levine: http://levine.sscnet.ucla.edu/general/intellectual/...


4

In a two-good space, initially the consumer maximizes $U(x,z)\;\; s.t. \;\;p_xx+p_zz =I$ and we assume it obtains the solution $(x^*, z^*)$ as a function of prices and income. In the constrained case, the consumer will either choose $(0, \tilde z)$ or $(x^*+\epsilon, z'$), for some $\epsilon >0 $ always exhausting its budget, so in particular, $\tilde ...


4

This is quite fundamental, so I'd encourage you to look up your textbook as well... but here's a short explanation. Imagine that there are $n$ consumers in the market. You sort them by their willingness to pay from high to low. So the first consumer is willing to pay very high, and so on. Let's say the willingness to pay (sorted) is 12, 10, 9, 7, 5, 4, 2. ...


3

Consumer surplus is their willingness to pay minus the price they pay, and producer surplus is the price they receive minus their willingness to receive. So if you are assuming that consumers are forced to buy at a price of 100, yes the consumer surplus is negative. and according to your example, the producer surplus will be zero. You are right it does not ...


3

It appears that the consumer faces an exogenous additional constraint in her optimization problem, which restricts the feasible set for the good in question, say $x$. We take this for granted: the consumer will buy either zero or at least what the store demands at the minimum, say $\bar x$. No other options are available. But this means that the consumer ...


3

Under standard assumptions (some of which you state in your question: no externalities, etc.), no. This follows from the First Welfare Theorem. Perhaps there are departures from standard models that would support something resembling your conclusion, but my guess is that most economists would view any such departure as the absence of “perfect competition”. ...


3

The mistake you are making appears to be treating $\theta_i$ as a variable while in reality it is a specific value of the derivative. So $$\int_0^{q_i} V'(q)dq = \int_0^{q_i} \theta_i dq \;\;\; i=l,h$$ is wrong, since $V'(q)$ equals $\theta_l$ evaluated at $q_l$ only (and equals $\theta_h$ evaluated at $q_h$ only).


3

Image courtesy http://economicsonline.co.uk/ Consumer surplus is the sum (integral) of differences between the price each consumer would have payed and the price they got to pay. You need to find out the area of the green zone on the above graph, in the case of your model.


3

Actually, neither demand for Veblen good nor for Giffen good is strictly increasing in price. In case of Giffen good the demand actually looks as shown below in picture 1. The reason for this is that you can only increase demand for the Giffen good up until you consume your entire budget. Once the price gets higher then that you still get normal downward ...


3

Answer to the Question on Welfare The welfare analysis is not as simple as that. First, let us set aside for a second any inequality considerations (we can add them on later but there are some misconceptions about welfare analysis that have to be corrected first). Welfare in supply-demand analysis is conventionally measured by amount of consumer and ...


3

Although your question is already answered, I am just adding a small interesting detail that might help from doing some math (especially if the demand function is rather complex): See that (for any constant $a$): $$f(x) = \frac{d}{dx}\int_a^x f(x)$$ Now just looking at the definition of CS, we have that $CS'=-D(p)$


3

The MU question you quote is poorly worded. Here the proper answer would be: C Indeterminate with the given information First we can visualize it as shown on the diagrams shown below. Consumer surplus is the difference between willingness to pay (given by demand)`and price they actually pay so for all consumers it is the area below demand curve and above ...


2

Assuming that market power is given, discrimination is always beneficial to agents whose indifference price is smaller than the optimal non-discriminatory price. This is because under discrimination, they will get the good at their indifference price. Without discrimination, they will not get the good at all.


2

I'm going to give you the intuition behind this exercise, so you can solve it for your own. The definition of deadweight loss is the following: In economics, a deadweight loss is a loss of economic efficiency that can occur when equilibrium for a good or service is not achieved or is not achievable. Causes of deadweight loss can include monopoly pricing, ...


2

Your reasoning is correct (i.e. the book is wrong). First, let's follow the book's logic a little more carefully step by step, beginning with the case where p1 changes first: a fall in p1 leads to a gain of A in market 1 and of H in market 2 (because D2 shifts). a subsequent fall in p2 leads to a gain of B + C in market 2 (we are now using the new demand ...


2

What is CS and PS out-of-equilibrium at $P=30$: I think that answer to this question lies in misunderstanding the definition's of consumer and producer surplus. The consumer and producer surplus are actually (following Mankiw Principles of Economics, 8th ed, pp 135 and 140 consumer surplus: the amount a buyer is willing to pay for a good minus the amount ...


2

First of all, there is no need to believe any economic dogma. The real world is usually more complicated than these stories. If anyone can convince me of something with a two minute anecdote, that was probably not an important aspect of my world view, and I should probably not engage in setting such policy. (E.g. via voting for the person who tells the same ...


2

Tax is payed by the party it’s levied on, but I think your question is about tax burden and loss of consumer/producer surplus. In this case both producers and consumers loose the same amount of their surplus, as you can calculate the lost area which is for both of them 40. However, in real life this does not have to be symmetric. It depends on the ...


2

The key to this is in the hint. It lets you know supply and demand are both linear, so you need to figure out what the functions of those two curves are. In this case, you have $$ Q_D = 18 - 1.5P $$ $$ Q_S = 3P $$ Plot these on a supply/demand graph (P on the vertical axis, Q on the horizontal), and the consumer surplus is the shaded area (note, it stops at ...


2

Consider two situations: (i) a price so high that no consumer buys a good, (ii) the market price at which supply and demand are equal. CS=PS=0 in situation (i) and CS>0 and PS>0 in situation (ii). If you move from (i) to (ii) CS increases and PS as well. If you move from (ii) to (i) PS decreases and so does CS. If consumers cannot be forced to buy, the ...


2

First of all its all just joke so you should not read too much into it. Most jokes are based on some false/overly simplified premise. You are right: There are two problematic claims here: Being offered a choice between two identical packages of M&Ms is equivalent to being offered nothing. This is erroneous argument if for no other reason than that in ...


2

The joke is conflating the value of the item you get and the value of the option to determine which item you get. Suppose I value the Snickers at $\\\$.4$ and the M&Ms at $\\\$.75$. If I am offered a Snickers for free my economic profit is $\\\$.4$. If I could get the additional option to choose between the Snickers and a bag of M&Ms, rather than ...


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