Measuring Hicksian Welfare Changes from Marshallian Demand Functions

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October 1991

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A.E. Res. 91- 10

Measuring Hicksian Welfare Changes From Marshallian Demand Functions

Jesus

c. Dumagan

and Timothy D. Mount

Department of Agricultural Economics Cornell University Agricultural Experiment Station New York State College of Agriculture & Life Sciences A Statutory College of the State University Cornell University, Ithaca, NY 14853

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Measuring Hicksian Welfare Changes From Marshallian Demand Functions

Jesus

c. Dumagan &

Timothy D. Mount*

Department of Agricultural Economics Warren Hall Cornell University Ithaca, New York 14853

October 1991

Abstract
A problem persists in measuring the welfare effects of simultaneous price and income changes because the Hicksian compensating variation (CV) and equivalent variation (EV), while unique, are based on unobservable (Hicksian) demand functions, and observable (Marshallian) demand functions do not necessarily yield a unique Marshallian consumer 's surplus (CS). This paper proposes a solution by a Taylor series expansion of the expenditure function to approximate CV and EV by way of the Slutsky equation to transform Hicksian price effects into Marshallian price and income effects. The procedure is contrasted with McKenzie 's "money metric" (MM) measure derived from a Taylor series expansion of the indirect utility function. MM requires a crucial assumption about the

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