5.2 Compensated Consumer Welfare

Ideally, we want to measure how a consumer’s utility changes in response to the change in a price. However, because utility is an ordinal measure, we use a monetary equivalent.

Initially, a consumer with an income of Y who faces prices (p1,p2)[&(p_{1}, p_{2})&] picks a bundle of goods that provides a level of utility of U¯[&*obar*{U}.&]. The price of the first good rises so that the consumer now faces prices (p1,p2)[&(p_{1}^{*N*[0%3]|lgast|*N*[0%-3]}, p_{2}).&]. To obtain the initial level of utility U¯,[&*obar*{U},&] the consumer now needs more income, Y*. Thus, Y*[&Y|-|Y|ast|&] is a monetary measure of the change in utility due to the change in a price.

Unfortunately, the change in consumer surplus provides ...

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