401-EVCV - Econ 401 EV and CV Consider a two-good world in...

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Unformatted text preview: Econ 401 EV and CV Consider a two-good world in which the consumer is endowed with wealth w and prices change from ( p 1 1 , p 1 2 ) to ( p 2 1 , p 2 2 ) . As a consequence of the price change, the consumer’s utility changes from U 1 ≡ u ( x 1 ( p 1 1 , p 1 2 , w ) , x 2 ( p 1 1 , p 1 2 , w )) to U 2 ≡ u ( x 1 ( p 2 1 , p 2 2 , w ) , x 2 ( p 2 1 , p 2 2 , w )) . De f ne the equivalent variation measure of the welfare e f ects of the price change as the number of dollars it would take to move the consumer’s welfare from U 1 to U 2 at the original prices ( p 1 1 , p 1 2 ) . Using the de f nition of the expenditure function EV = e ¡ p 1 1 , p 1 2 , U 2 ¢ − e ¡ p 1 1 , p 1 2 , U 1 ¢ But, by assumption, e ¡ p 1 1 , p 1 2 , U 1 ¢ = w = e ¡ p 2 1 , p 2 2 , U 2 ¢ so EV = e ¡ p 1 1 , p 1 2 , U 2 ¢ − e ¡ p 2 1 , p 2 2 , U 2 ¢ The compensating variation measure of the welfare e f ects of the price change uses the new prices ( p 2 1 , p 2 2 ) to measure the welfare change from...
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This note was uploaded on 01/26/2012 for the course ECON 401 taught by Professor Burbidge,john during the Fall '08 term at Waterloo.

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401-EVCV - Econ 401 EV and CV Consider a two-good world in...

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