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A consumer has the utility function

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0601. A consumer has the utility function U(X,Y) = min(2X,3Y). Initially the price of X is $3 (px=3) and the price of Y is $2 (py=2). Our consumer has an income of $195 (m=195).;Now assume that the price of Y rises from $2 to $3 (py? =3) while the price of X stays the same.;a) Calculate compensating variation.;b) Calculate equivalent variation.;c) Define and distinguish between compensating variation and equivalent variation in the context of your answers in part a and in part b.

 

Paper#28494 | Written in 18-Jul-2015

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