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In case of normal goods we typically overestimate the DWL if we calculate it from the...

In case of normal goods we typically overestimate the DWL if we calculate it from the uncompensated demand.

True or False? Please explain.

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Answer #1

In case of normal goods, we know that the demand increases when the income level of an individual increases. Therefore this sudden increase in demand will try to shift the market out of equilibrium.

Uncompensated demand is the scenario in which the money income is assumed to be constant. So, when prices increase or decrease, the consumer will try to reduce his welfare loss by varying his demands which can be satisfied within the income. So, the deadweight loss is generally overestimated in this case because the consumer tries his best to reduce his welfare losses thereby deadweight loss, which we are not able to interpret numerically therefore it's not being taken into account.

Hope this helps. Cheers!

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