Economics Research Institute Study Paper
Utah State University Department of Economics
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Many economists agree that the best measure of consumer's surplus is the compensating variation consumer's surplus (eVeS); however, because the compensated demand function is not observable, there are problems of using this measure in empirical applications. There are ways around this limitation that work well under certain circumstances; however, until now there has been no solution that always works well. We introduce a successive approximations method of calculating compensating variation consumer's surplus using data from the ordinary. demand curve. In doing so we numerically identify the compensated demand function over the price interval involved. This procedure can be implemented on any ordinary demand function that is . '. consistent with a quasi-conc'ave utility ' function, and does riot require that we integrate back to .' . the utility function. We demonstrated that the error of our approximation can be made extremely "small." We also use our method to calculate eves for three applications in the literature where Marshallian consumer's surplus was reported.
Lyon, Kenneth S. and Yan, Ming, "Compensating Variation Consumer's Surplus Via Successive Approximations" (1993). Economic Research Institute Study Papers. Paper 29.