In: Economics
(a) What is the compensating variation? What is the
equivalent
variation? What is the di¤erence between them?
(b) You consume two goods, good x and good y. These goods
sell
at prices px = 1 and py = 1, respectively. Your preferences
are
represented by the following utility function: U(x; y) = x +
ln(y):
You have an income of m = 100. How many units of x and y
will you buy and what will is your utility? If px increases
from
$1 to $2; gure out the compensating variation (CV) associated
with price change.
(c) If instead your utility is U(x; y) = ln(x) + y; gure out the
com-
pensating variation (CV) as px increases from $1 to $2:
(d) Are the compensating variations the same for both of the
above
utility functions? Explain your answer rigorously.