2. Compensating Variation and Equivalent Variation (CV-EV): A consumer has u=: (a) Derive the consumer's demands for good 1 and 2 as a function of income, M, and prices pi and p2 using the MRS and the budget line. (b) Now let M = 10 and initially the prices are both 1, but then pi rises to 2. Solve numeri- cally for the CV and EV associated with this change. Also show these effects on clear complete graphs. (c) Suppose you wanted to estimate the consumer surplus (CS) associated with this change. without computing anything further, what would be your estimate of the CS change? Which of CV, EV and CS are the best measure of welfare change? Why?

The consumer's demands for good 1 and 2 can be derived using the MRS and the budget line. The MRS is…

Answered: 2. Compensating Variation and Equivalent Variation (CV-EV): A consumer has u=: (a) Derive the consumer's demands for good 1 and 2 as a function of income, M,…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN: 9780190931919

Author: NEWNAN

Publisher: Oxford University Press

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2. Compensating Variation and Equivalent Variation (CV-EV): A consumer has ura
(a) Derive the consumer's demands for good 1 and 2 as a function of income, M, and prices pi
and p2 using the MRS and the budget line.
(b) Now let M 10 and initially the prices are both 1, but then pi rises to 2. Solve numeri-
cally for the CV and EV associated with this change. Also show these effects on clear complete
graphs.
(c) Suppose you wanted to estimate the consumer surplus (CS) associated with this change
without computing anything further, what would be your estimate of the CS change? Which
of CV, EV and CS are the best measure of welfare change? Why?

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