Reference no: EM131081077

Suppose that consumer’s utility is described by the following function: U(x;y) = x²y, where x is the amount of good X that the consumer consumes and y is the amount of good Y that the consumer consumes. Consumer’s income is 360 euros. Suppose that the price per unit of good X is currently 6 euros and the price per unit of good Y is currently also 6 euros. Suppose that Government is planning to introduce a tax per unit of good Y, which will result in an increase of the price of good Y from 6 euros to 12 euros (for the consumer). Suppose that the price of good X will not change. Find the minimum compensation (compensating variation), which Government should pay to the consumer (in case of such policy) if it wants to maintain the consumer’s well-being at pre-policy level.