The lie: Better off by
Only true if IIG (Income Independent Good)
Like dental care. Something you need regardless of income.
- Not many things are IIG. For normal goods, you over-estimate and for inferior goods underestimate.
- We need to look only at the substitution effect, not the income effect.
- We use the Hicksian demand curve to measure actual change.
What is the max WTP (willing to pay)?
H.A.I.C= highest, affordable, indifference curve.
or with club
3.) utility as bundle
Max willing to pay is
Compensating variation is CV is max willing to pay .
How much do we need to vary your income to compensate the price change?
Ordinary D curve:
less than 18
The consumers are better of by CU is . Why would you only pay to get ?
Because this is wrong! Ordinary D overstates benefit of normal goods.