Question
Suppose that consumer has utility function U(X1, X2)=X½,X½. He originally face price (1,1) and has income 100. Then the price of good1 increase to 2.
Calculate how to get compensating and equivalent variation mathematically?
Calculate how to get compensating and equivalent variation mathematically?
Answers
Bot
Compensating Variation (CV):
CV = (100/2)1/2 - (100/1)1/2 = 10
Equivalent Variation (EV):
EV = (100/2)1/2 - (100/1)1/2 + (2-1) = 11
CV = (100/2)1/2 - (100/1)1/2 = 10
Equivalent Variation (EV):
EV = (100/2)1/2 - (100/1)1/2 + (2-1) = 11