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Unformatted text preview: each good is $1. Her utility function is u ( x 1 ,x 2 ) = x 1 + 2 x 2 . Anne is oered to a transfer to City B where the price of good 1 is $2 and the price of good 2 is $1. She is oered a 50% increase in pay. Anne understands compensating variation and equivalent variation perfectly. (a) If Anne considers all other features of the two cities to be the same, will she accept the move? Support your answer. (b) How much would Anne require to be paid in City B to accept the move? Support your answer. (c) How does the change in price and salary compare to Annes current salary in City A? The oer is the same as a pay cut (or increase) of what magnitude? Support your answer. (d) In part (b) are you calculating the equivalent variation or the compensating variation? Support your answer. 1...
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- Winter '10