Intermediate Microeconomics · free preview
Compensating and Equivalent Variation
For general preferences two exact welfare measures replace the surplus area, compensating variation, the income change that restores the old utility at new prices, and equivalent variation, the income change worth the price change at old prices, income effects driving them apart.
1. Two exact questions
Two exact questions
2. A Cobb-Douglas computation
A Cobb-Douglas computation
3. Why the split
Why the split
4. From measures to practice
From measures to practice
5. Defining CV
Price rises and the consumer is harmed. What exactly is compensating variation?
6. The bracket order
For a normal good's price rise, how do the three measures order themselves?
7. The worked numbers
In the Cobb-Douglas example, p1 rises from 1 to 2 with income 100. What are CV and EV?
8. When they coincide
Under what condition do CS, CV, and EV all give the same number?
9. The expenditure at old utility
For u equal to x1 x2 with prices 2 and 1, compute e at utility 2500, that is 2 times the square root of 5000, rounded to one decimal, and write the number.
10. CV from it
Subtract the original income 100 from that expenditure, and write the compensating variation.
11. The equivalent variation computed
In the Cobb-Douglas example, p1 rises from 1 to 2 with income 100. What is the equivalent variation?
12. The area between the exact pair
For the same price rise, the demand-curve area gives about 34.7. How does it place among CV and EV?
13. The ordering with numbers
For this normal good's price rise, which ordering of the three welfare measures holds?
14. The damage question phrased
Which question does the equivalent variation of 29.3 answer in this example?
15. The new utility level
For u equal to x1 x2 with income 100 after p1 rises to 2, compute the new optimal utility, and write the number.
16. Cheaper prices for the smaller utility
At the original prices 1 and 1, compute the expenditure reaching utility 1250, that is 2 times the square root of 1250, rounded to one decimal, and write the number.
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