Question

Anna spends her income on green goods (G) and brown goods (B). Initially, Anna's income is $30, the price of green goods is $2, and the price of brown goods is $1. The government introduces a new regulation that increases the price of brown goods to $5.  

Her utility function is as before: U(G,B) = G^2B

Her marginal utility for green goods is: MUg = 2GB

Her marginal utility for brown goods is: MUg = G^2

1) For this specific setting, the change in Anna's consumer surplus from the policy is equal to:

A. The compensating variation

B. The equivalent variation

C. Both the compensating and the equivalent variations

D. Neither the compensating nor the equivalent variation

E. There is not enough information to answer

2) Write down the equations that you need to find Anna's equivalent variation

Answer 1