Student number: 15081884
Word count: 1043
MICROECONOMICS 2
COURSEWORK (20%)
Consumer utility and behavior are slightly different from each other beginning with the term consumer utility, this term was created by economists to describe the satisfaction or the usefulness a consumer acquires or obtains after using a good or service (Boundless, 2016) If a consumer continues to consume said good or product the level of satisfaction they get from that product starts to reduce or diminish which is known as diminishing marginal utility. It can be said that a consumer makes decisions based on the utility gained based on one option or the other, consumer behavior on the other hand is a phrase much used in economics and it can be explained as a series of steps or decisions a consumer goes through when they decide to either choose, purchase, use or dispose products and services and satisfy human wants
There are several types of welfare measurement to analyze policies like compensation variation (CV), equivalent variation (EV) and consumer surplus
Compensation variation can be defined as a certain amount of money a person will have to be compensated for a change in price so as to remain at the initial level of utility (Morgan, Katz, Rosen, 2006). An equivalent variation on the other has more to do with the change in income not price, it can be defined as the change in income that is equivalent in its effect on utility to a change in the price of a commodity (Morgan, Katz, Rosen, 2006). We are given two different scenarios, First scenario: The green party leader convinced the government to impose green tax on air travel. The government wants to compensate individuals for this policy. …show more content…
This scenario has to do with the green party leader convincing the government to impose the green tax on air travel and also wanting to compensate individuals for this policy the best welfare measurement for this scenario would be compensation variation, going on what compensation variation means, the government is trying return consumer or individuals to their initial level of utility what this implies is the tax that has been imposed on consumers has caused an increase in the price of air travel which could cause a decrease in demand for air travel and an increase in demand for other forms of transportation such as cars, ships etc however the government has agreed to compensate the consumers which returns the consumers to their initial point of utility which they used to enjoy , the government has already started imposing green tax on air travel in the us and also in the European union (EU) “The cost of air travel will have to increase for consumers because the airlines will pass down the cost to passengers and the EU has estimated the cost will be £10.50 for a one-way transatlantic flight – or £21 return. For many shorter flights it will be up to £1.75 each way” (Massey, 2011) Figure 1 This graph shows the income and substitution effect of the green tax on air travel, B1 is the first budget constraint and U2 is the limit indifference curve that an individual can attain with the given budget constraint B1 the price of air travel has increased because of the green tax being imposed which shifts the individuals optimal position downwards from U2 to U1. Consumers will start to reduce the frequency at which they pay for air travel, the new dashed budget line which is know as the intermediate budget line is introduced because the rise in price makes the relative prices change and causes a shift in the budget line and rotates it, so the intermediate budget line is introduced to isolate or seal off these two changes. The intermediate line represents the compensation the government gives to return consumers to their old point of utility they were previously enjoying SECOND SCENARIO: A new elected government wants to compensate individuals for not meeting its pre-election promises to reduce Value Added Tax (VAT) Value added tax be defined as the tax imposed on goods being imported to the UK and the expenditure or cost a consumer incures (Financial times, 2016) The second scenario talks about a new elected government that wants to compensate individuals for not meeting its pre-election promises to reduce value added tax,
Word count: 1043
MICROECONOMICS 2
COURSEWORK (20%)
Consumer utility and behavior are slightly different from each other beginning with the term consumer utility, this term was created by economists to describe the satisfaction or the usefulness a consumer acquires or obtains after using a good or service (Boundless, 2016) If a consumer continues to consume said good or product the level of satisfaction they get from that product starts to reduce or diminish which is known as diminishing marginal utility. It can be said that a consumer makes decisions based on the utility gained based on one option or the other, consumer behavior on the other hand is a phrase much used in economics and it can be explained as a series of steps or decisions a consumer goes through when they decide to either choose, purchase, use or dispose products and services and satisfy human wants
There are several types of welfare measurement to analyze policies like compensation variation (CV), equivalent variation (EV) and consumer surplus
Compensation variation can be defined as a certain amount of money a person will have to be compensated for a change in price so as to remain at the initial level of utility (Morgan, Katz, Rosen, 2006). An equivalent variation on the other has more to do with the change in income not price, it can be defined as the change in income that is equivalent in its effect on utility to a change in the price of a commodity (Morgan, Katz, Rosen, 2006). We are given two different scenarios, First scenario: The green party leader convinced the government to impose green tax on air travel. The government wants to compensate individuals for this policy. …show more content…
This scenario has to do with the green party leader convincing the government to impose the green tax on air travel and also wanting to compensate individuals for this policy the best welfare measurement for this scenario would be compensation variation, going on what compensation variation means, the government is trying return consumer or individuals to their initial level of utility what this implies is the tax that has been imposed on consumers has caused an increase in the price of air travel which could cause a decrease in demand for air travel and an increase in demand for other forms of transportation such as cars, ships etc however the government has agreed to compensate the consumers which returns the consumers to their initial point of utility which they used to enjoy , the government has already started imposing green tax on air travel in the us and also in the European union (EU) “The cost of air travel will have to increase for consumers because the airlines will pass down the cost to passengers and the EU has estimated the cost will be £10.50 for a one-way transatlantic flight – or £21 return. For many shorter flights it will be up to £1.75 each way” (Massey, 2011) Figure 1 This graph shows the income and substitution effect of the green tax on air travel, B1 is the first budget constraint and U2 is the limit indifference curve that an individual can attain with the given budget constraint B1 the price of air travel has increased because of the green tax being imposed which shifts the individuals optimal position downwards from U2 to U1. Consumers will start to reduce the frequency at which they pay for air travel, the new dashed budget line which is know as the intermediate budget line is introduced because the rise in price makes the relative prices change and causes a shift in the budget line and rotates it, so the intermediate budget line is introduced to isolate or seal off these two changes. The intermediate line represents the compensation the government gives to return consumers to their old point of utility they were previously enjoying SECOND SCENARIO: A new elected government wants to compensate individuals for not meeting its pre-election promises to reduce Value Added Tax (VAT) Value added tax be defined as the tax imposed on goods being imported to the UK and the expenditure or cost a consumer incures (Financial times, 2016) The second scenario talks about a new elected government that wants to compensate individuals for not meeting its pre-election promises to reduce value added tax,