The compensation variation and equivalent variation will be close to each other when

a. the income elasticity of demand is very large

b. the budget share is very large

c. the price change is large

d. the product of the budget share and the income elasticity of demand is small.

Expert Solution

We have two-component in the question i.e. 1.Compensation Variation and 2.Equivalent variation

From the indifference curve analysis, we have studied Price consumption curve and in which we saw when the price of the good falls, other thing remaining the same consumer would move to new equilibrium position at higher indifference curve. This movement is only due to the price effect

As per the Hicksian approach, there are two methods splitting the price effect into income effect and substitution effect

1.Compensation variation-To offset the gain in satisfaction resulting from a fall in the price of the good we must take away from the consumer enough income to force him to come back to the original indifference curve. This required reduction in income (Say through levying a limp sum tax) to cancel out the gain in satisfaction by a reduction in the price of a good is called compensating variation

2.Equivalent variation-Now the same increase in satisfaction can be achieved through bringing about an increase in his income, price remaining constant.this is called equivalent variation because it represents variation income that is equivalent in terms of gain in satisfaction to a reduction in the price of the good.

The correct answer is (C) the price change is large- As it's related to change in the price of the good

(a) income elasticity of demand is large when income spent on good rises as income increase

(b)the budget share-its not related

(d) the product of the budget share and the income elasticity of demand is small.- it's not relevant

Rahul Sunny answered 2 years ago

(a) What is the compensating variation? What is the equivalent variation? What is the diference between...

(a) What is the compensating variation? What is the equivalent variation? What is the diference 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...

(a) What is the compensating variation? What is the equivalent variation? What is the di¤erence between...

(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...

(a) What is the compensating variation? What is the equivalent variation? What is the di⁄erence between...

(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...

suppose that a food processing plant and a chemical factory are located close to each other...

suppose that a food processing plant and a chemical factory are located close to each other on the banks of a river. The chemical factory uses the river to discharge its emissions. The food processing plant (located somewhere downstream) suffers damages from the emissions as it requires clean water for its operations. Assuming MAC = 240-2E and MD = 3E, answer the following questions. Draw this diagram before answering the questions below. You will be asked to upload the diagram...

Suppose that a food processing plant and a chemical factory are located close to each other...

Suppose that a food processing plant and a chemical factory are located close to each other on the banks of a river. The chemical factory uses the river to discharge its emissions. The food processing plant (located somewhere downstream) suffers damages from the emissions as it requires clean water for its operations. Assuming MAC = 240-2E and MD = 3E, answer the following questions. Draw this diagram before answering the questions below. You will be asked to upload the diagram...

Use you knowledge of indifference curves, substitution effects, equivalent variation, and compensating variation to explain why...

Use you knowledge of indifference curves, substitution effects, equivalent variation, and compensating variation to explain why subsidizing the use of water is inefficient. Assume subsidization takes the form of reducing the price of water paid by a consumer from pw to (1–s)pw where s is the subsidy rate. please add graphs as well. thank you

Two large thin metal plates are parallel and close to each other as in figure shown...

Two large thin metal plates are parallel and close to each other as in figure shown above. On their inner faces, the plates have surface charge densities of opposite signs and of magnitude 7 * 10-22 C/m2. The negatively charged plate is on the left and the positively charged plate is on the right. What are the magnitude and direction of the electric field E (a) to the left of the plates? » Direction: ? Straight out of the computer...

Are the following statements equivalent to each other? 1.a continuous rate of payment of $100 per...

Are the following statements equivalent to each other? 1.a continuous rate of payment of $100 per year 2. a continuous rate of payment of $50 semi-annually

Why do competing firms often locate their stores in close proximity to each other? For example,...

Why do competing firms often locate their stores in close proximity to each other? For example, gas stations always built right next to other gas stations. Fast food chains, grocery stores, coffee shops, and restaurants always seem to exist in groups instead of being spread evenly throughout a community. CAN YOU PLEASE MAKE THE ANSWER AT LEAST 100 WORDS.

[x, y, and z are integer variables, which expressions are equivalent to each other?] a. (x==y...

[x, y, and z are integer variables, which expressions are equivalent to each other?] a. (x==y && x !=z) || (x!=y && x==z) b. (x==y || x==z) && (x!=y || x!=z) c. (x==y) != (x==z)

Question