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1. Alice enjoys consuming goods z and y. Where (x, y) is the consumption bundle and 0 < a < 1, Alices utility is: u(z, y) -zy- (a) Originally, Alice has income m 16, and faces prices p Py1, and consumes a bundle at which her utility (subject to her budget) is maximised. Then, py rises to 4. Alice is sadder with the new bundle she chooses, and tells you that her compensating variation is 16: that is, she would need an extra 16 dollars to be as happy at the new prices as she was at the old ones. Assuming Alice is telling you the truth, find a. b) Find Alices equivalent variation.

Is the answer to part (a) 2/3 or 1/2?

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