Teaching Hausman and Willig Using Mathematica
Document Type Article
Guest presentation for Dr. Mel Borland's Applied Microeconomic Theory course, Fall 2007, Department of Economics, Western Kentucky University.
Analyzing consumer welfare from observable data, or empirical demand functions has been a very controversial issue in economics. One metric often used is deadweight loss from a tax or price increase. A classic debate in economic history regarding the appropriate methodology for measuring deadweight loss involves two papers published in the American Economic Review by Jerry Hausman and Robert Willig. In ‘Consumer’s Surplus Without Apology’ Willig contends that the error in approximating deadweight loss using the observable Marshallian demand curve is small for small price changes and an acceptable practice. Hausman argues in ‘Exact Consumer’s Surplus and Deadweight Loss’ that approximations in error need not decrease with small price changes. Utilizing Mathematica software, this presentation provides a graphical, numeric, and symbolic explanation of this debate.