Question

Marvin has a Cobb-Douglas utility function, U=9,0.5920.5, his income is Y = $900, and initially he faces prices of p1 = $1 and P2 = $2. If p, increases from $1 to $2, what are his compensating variation (CV), change in consumer surplus (ACS), and equivalent variation (EV)? Marvin's compensating variation (CV) is $ 1. (Enter your response rounded to two decimal places and include a minus sign if necessary.) Marvin's change in consumer surplus (ACS) is $ . (Enter your response rounded to two decimal places and include a minus sign if necessary.) Marvin's equivalent variation (EV) is $ . (Enter your response rounded to two decimal places and include a minus sign if necessary.)

Answer 1

0.5 0.5 0.5 0.5 Ja Jaz dolar doldal tota MRS= Joldas JaL 219 2192 12 Jold92 sal 2092 20 2 2 þ- p2 NI- equilibrium conceition MRS = Pi 2 = > 29, -9, from Budget constraint Pliqit Pr Q2 = 7 1.qit 2 2 2 = 900 9, + q = 900 = Q = 900 = 450 2 - 2 - 225

If frice pe increcipe from p = 2. to 1 To 2. cost of previous Bunale was, with new Prices. pil.9, + P2.92 = 450 (2) + 225 (2) - 90ot 450 - 1350 CU= 1350-900 = $450 equivalent variation with P = 2. cum conaition & MRS= bi 92 = 2 = 1 + 9 = 92 from Budget constraint. pait kr.22 = 900 = 291+ 2q2 =900 = 49, 900 = 9,= 900

900 to = 225 9 = 225 So cost of this new Bundce at original Incos. I (225) + 2 (225) pl.qit be q2 = = 225+ uso = 675 Equivacant variation = 900-075 Ev. = $225 Now UCS = pi=1 0 225 450 ACS = (asoro) (2-1) (0) (225-0) + I (24) (225) - uso (T) = u59 460 + + (225) 225 ACS = 295€+ 225 = 337.5