A preference-maximising consumer’s expenditure function is e(p1, p2, u) = p2(4p1u − p2)/ 4p1 . Suppose...

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A preference-maximising consumer’s expenditure function is e(p1, p2, u) = p2(4p1u − p2)/ 4p1 . Suppose...

A preference-maximising consumer’s expenditure function is

e(p1, p2, u) = p2(4p1u − p2)/ 4p1 .

Suppose that the prices of the goods are initially p 0 1 = 1, p 0 2 = 4, and that the consumer’s income is $120. The prices change to p 1 1 = 2, and p 1 2 = 2 with no change in the consumer’s income.

Find the equivalent variation and the compensating variation associated with these price changes. Interpret the numbers you have obtained.

business economics

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