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Unformatted text preview: CV EV If the demand for good 1 is inferior: 0 EV CV In the case of a price increase or a tax: Compensating Variation (CV) Equivalent Variation (EV) Thought Experiment What is the maximum the consumer would be willing to pay to get the price increase or tax? (A negative amount!) How much would the consumer be willing to accept in lieu of the price increase or tax? (Again, a negative amount!) Normal Good Normal Good Graphs Inferior Good Inferior Good Magnitudes/ Signs If the demand for good 1 is normal: CV EV If the demand for good 1 is inferior: EV CV Note: The diagrams for inferior goods depict Giffen Goods, very inferior goods. (As prices increase, demand increases.) The same CV/EV relationships hold for inferior goods that are not Giffen....
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- Fall '08