Question1 23-10

# To nd slutsky compensation 4 points its necessary to

• Notes
• MegaIceMosquito9510
• 1

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To °nd Slutsky compensation (4 points) it±s necessary to calculate the initial consumption bundle and, then, °nd the income that makes this bundle available under the new prices. From part (a) we get x 1 = 5 ; y 1 = 5 and I 0 = 5 ² 5 + 5 = 30 So, the Slutsky compensation is equal to 20 . To °nd Hicksian compensation (6 points) we need to °nd initial utility level and, then, we can apply the following formula HC = E ( p 0 x ; p y ; U 1 ) ° E ( p x ; p y ; U 1 ) Taking what we found in d) and in b) into consideration one can get that HC = 5 r 16 5 + 1 ! + ° p 16 ² 5 + 1 ± ° 10 = 8 p 5 ° 4 Comments: for correct formulas you get one point e) The full answer would look like the following: the Slutsky compensation allows a consumer to achieve the initial consumption bundle under new prices. However, since the prices have changed, consumers will adopt to new condition on the market and choose another consumption bundle (unless the goods are perfect complements) achieving higher utility compared to their initial level. With Hicksian compensation consumer will get exactly their initial utility level. So, since under Slutsky the °nal utility is greater than under Hicks, the compensation has to be larger under Slutsky. 1
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• Fall '08
• StephenE.Morris
• Economics, Px Py, dx Px Py

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