Question

I would like to know CV, EV and change in consumer's surplus for an inferior good :)

Answer 1

Compensating Variation measures the change in utility. In simple it refers to the amount of additional money you would need to reach to your initial utility after change in prices, change in product quality, or maybe introduction of fresh products.

The equivalent variation is the change in wealth at current prices that would have the same effect on consumer welfare as the change in prices would have given that the income is unchanged.

In the case of inferior goods, EV<CV. This is because the Marshallian demand functions are less steeper than Hicksian demand function.

Change in consumer surplus is defined as the difference between what the consumer is willing to pay and how much it actually costs. We know that in case of inferior goods, the demand for the good decreases as the income increases. Therefore the change in surplus decreases because now the price of the goods increase which reduces the gap between what consumer is willing to pay and the price he actually pays.

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