Often economists measure the loss in consumer surplus by looking at the changing area below the Marshallian demand curve.This approach will provide a more accurate measure of the compensating variation of such a price increase if:
A)the good occupies a small portion of a person's budget.
B)the good occupies a large portion of a person's budget.
C)the good has many close substitutes.
D)the good has few substitutes.

Question

Often economists measure the loss in consumer surplus by looking at the changing area below the Marshallian demand curve.This approach will provide a more accurate measure of the compensating variation of such a price increase if:​
A)​the good occupies a small portion of a person's budget.
B)​the good occupies a large portion of a person's budget.
C)​the good has many close substitutes.
D)​the good has few substitutes.

Quizplus · Accepted Answer

CThe Marshallian demand curve, which reflects how quantity demanded varies with price while holding income and other factors constant, provides a more accurate measure of the compensating variation (the amount of money a consumer would need to reach their original utility after a price increase) for goods that occupy a small portion of a person's budget because the income effect is minimal in such cases. Similarly, when a good has many close substitutes, consumers can easily switch to alternatives without significant loss in utility, making the Marshallian demand curve a good approximation for measuring changes in consumer surplus.

Often Economists Measure the Loss in Consumer Surplus by Looking